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HOME  UNIVERSITY  LIBRARY 
OF  MODERN  KNOWLEDGE 

No.  5 

Editors : 

HERBERT    FISHER,  M.A.,  F.B.A. 
PROF.  GILBERT  MURRAY,  LiTT.D., 

LL.D.,  F.B.A. 

PROF.  J.   ARTHUR    THOMSON,  M.A. 
P*OF.  WILLIAM  T.  BREWSTER,  M.A. 


A  complete  classified  list  of  the  volumes  of  THE 
HOME  UNIVERSITY  LIBRARY  already  published 
will  be  found  at  the  back  of  this  book. 


THE 

STOCK   EXCHANGE 

A   SHORT    STUDY    OF   INVESTMENT 
AND    SPECULATION 


FRANCIS  W.  HIRST 

EDITOR    OF   THE   ECONOMIST 


NEW   YORK 
HENRY   HOLT  AND    COMPANY 

LONDON 
WILLIAMS    AND    NORGATF 


IQII, 

.  V  :  f.; 

•HENR.Y  JHO^T  ANOf  -COMPANY 


THE  UNIVERSITY   P'RESS,   CAMBRIDGE,  U.S.A. 


CONTENTS 

CHAP.  PAGE 

INTRODUCTION  .........         7 

I     THE   EARLY  HISTORY   OF  BANKING   AND 

STOCK-JOBBING     .......        13 

II     THE    LONDON    STOCK    EXCHANGE.   180C- 

1910    ...........       40 

III     LONDON'S    FOREIGN    MARKET    AND    THE 

FOREIGN  BOURSES      ......        76 


IV     WALL  STREET 


V       GOOD    SECURITIES    AND    THE    ART    OF    IN- 

VESTMENT   .........        137 

VI     SPECULATIVE  SECURITIES  AND  MODES    OF 

SPECULATION   ........      iCi  1 

VII     WHY    THE    PRICES    OF   SECURITIES    RISE 

AND  FALL  .........      187 

VIII     THE  CREATION  OF  NEW  DEBT  AND    CAP- 

ITAL      ....      ......      212 

IX    CAUTIONS  AND  PRECAUTIONS      ....     242 

GLOSSARY    ..........     £53 

BIBLIOGRAPHY  ....  255 


THE  STOCK  EXCHANGE 


INTRODUCTION 

IN  an  old  Pennsylvanian  almanac  of  the 
eighteenth  century  two  qualities  were  postu- 
lated for  success  in  business:  first,  appli- 
cation or  industry,  and  second,  thrift  or 
frugality.  The  first  without  the  second  often 
leads  to  nothing.  "A  man  if  he  knows  not 
how  to  save  as  he  gets,  may  keep  his  nose  all 
his  life  to  the  grindstone,  and  die  not  worth 
a  groat  at  last."  The  old  proverb,  A  fat 
kitchen  makes  a  lean  mil,  should  remind  us 
moderns  that  not  only  excess  in  eating  and 
drinking,  but  luxurious  and  expensive  follies 
of  all  kinds  may  drive  the  hardest  worker  into 
debt  and  difficulty,  until  after  long  enjoyment 
of  a  good  income  he  ends  his  career  in  poverty 
and  dependence.  This  book  is  not  concerned, 
however,  with  the  moral  value  of  thrift,  or 
even  with  the  advantages  which  savings 
bestow  upon  the  individual.  Without  sav- 
ings indeed,  or  without  an  inherited  fortune, 

7 


f  8  THE  STOCK  EXCHANGE 

no  one  can  feel  quite  independent.  This 
is  a  strong  and  sufficient  moral  ground  for 
not  spending  all  that  one  earns.  But  our 
particular  business  is  neither  with  the  first 
process  of  earning,  nor  with  the  second  of 
saving,  but  with  a  third.  We  have  to  con- 
sider neither  the  making  nor  the  saving  of 
money,  but  its  investment  after  it  has  been 
earned  and  saved.  "Investment"  is  a  com- 
paratively new  word;  it  was  not  known  to 
Dr.  Johnson  as  a  financial  term,  and  many 
of  the  investor's  facilities  are  essentially 
modern.  Nor  does  our  subject  allow  us 
to  treat  of  all  investments,  it  confines  us  to 
that  most  usual  form  of  investment  in  Stock 
Exchange  Securities. 

But  it  is  important  to  bear  in  mind  through- 
out that  the  accumulation  of  wealth,  and  the 
reduction  of  poverty,  and  all  tjie  means  by 
which  material  comforts  and  conveniences 
are  multiplied,  by  w^hich  the  arts  flourish, 
by  which  letters  and  learning  are  spread 
through  all  ranks  of  society,  depend  ulti- 
mately upon  the  thrift  and  savings  of  indi- 
viduals, assisted  by  the  honesty,  the  efficiency 
and  the  peaceful  proclivities  of  their  Govern- 
ments. That  the  virtue  of  saving  is  easy  for 
the  rich  and  difficult  for  the  poor  must  be 


INTRODUCTION  9 

confessed;   that  it  is  sometimes  morally  and 
economically  right  to  spend  all  one's  income 
and  even  to  borrow  may  be  admitted.    But, ! 
nevertheless,  progress  depends  upon  saving,  i 
Banks  and  Stock  Exchanges,  which  facilitate 
and  encourage  saving,   are  themselves  the 
fruits  of  saving;    without  saving  they  could 
not  have  been  called  into  existence.     When 
capital  shrinks,  when  the  community  they 
serve  sinks  into  decay,  these  institutions  like- 
wise must  come  to  grief.    Thanks,  however/ 
to  the  onward  march  of  invention  and  science, ' 
as  well  as  to  the  growing  reluctance  of  nations 
to  engage  in  war,  progress  is  now  the  rule 
and  decay  the  exception. 

The  art  of  making  money  is  a  mystery 
which  cannot  be  taught;    and  though  many 
books  have  been  written  with  prescriptions, 
for  acquiring  a  fortune,  few  men  have  ever! 
made   themselves    a    penny    the    richer    by! 
reading  them.    But  the  art  of  keeping  money  j 
after  you  have  made  it,  and  of  increasing: 
your   surplus    capital    by   judicious   invest- 
ments, can  be  learnt.     Any  person  with  pru- 
dence and  self-restraint  can  in  ordinary  times 
and    circumstances    secure    himself    against 
serious   capital   depreciation,   and   obtain  a 
steady  dividend  on  the  moneys  he  has  been 


10  THE  STOCK  EXCHANGE 

able  to  put  by  from  time  to  time.  This 
was  not  always  so.  In  fact,  until  the  last 
century  property  and  trade  were  so  insecure, 
even  in  the  most  settled  and  civilised  coun- 
tries, that  a  man  who  had  saved  money 
was  often  at  a  loss  what  to  do.  He  might 
have  to  choose  between  spending  it  and 
hiding  it  away.  The  miser,  who  hoarded 
his  gold,  because  he  could  not  trust  it  out  of 
his  sight,  was  to  be  found  side  by  side  with 
the  Jew,  who  lent  it  out  at  exorbitant  rates 
of  interest,  calculating  that  he  would  gain 
in  usury  from  those  who  paid  more  than  he 
lost  in  bad  debts.  Pirates  by  sea,  brigands 
on  land,  sovereigns  and  nobles  who  extorted 
loans  only  to  repudiate  them,  Governments 
which  supplied  their  needs  by  debasing  the 
coinage,  or  by  issuing  worthless  paper  money 
• — these  are  but  samples  from  a  big  bunch 
of  circumstances  that  made  the  accumulation 
and  investment  of  wealth  in  olden  times  so 
difficult  and  hazardous. 

But  now,  apart  from  the  wonderful  im- 
provements in  administration,  justice,  and 
police,  the  most  skilful  and  successful  burglar 
can  no  longer  rob  a  rich  man  of  his  fortune. 
And  why?  Not  because  the  police  are  more 
efficient,  not  because  safes  have  been  per- 


INTRODUCTION  11 

fected,  not  because  the  art  of  thieving  has 
decayed.  No,  simply  and  solely  because  the 
rich  man  no  longer  buries  his  gold.  Hoarding 
is  obsolete  or  obsolescent.  It  has  been  super- 
seded by  two  special  inventions,  two  marvel- 
lously ingenious  contrivances,  which  have 
made  the  safe  disposal  of  savings  incom- 
parably simpler  and  easier.  These  inventions 
are  the  Bank  and  the  Stock  Exchange,  or, 
shall  we  say,  the  cheque  and  the  Stock 
Exchange  security? 

In  Great  Britain  and  the  United  States, 
in  Canada,  Australia,  New  Zealand  and  the 
Cape,  almost  every  one  who  is  in  the  posses- 
sion of  a  moderate  income,  say  £300  a  year, 
or  more,  has  a  bank  account,  into  which  he 
deposits  his  earnings  and  from  which  he 
draws  his  expenses.  If  he  is  of  a  thrifty 
and  saving  disposition,  he  lives  well  within 
his  income;  and  when  his  balance  at  the 
bank  grows  larger  than  is  necessary  he  will 
pick  out  a  security  and  instruct  his  banker 
or  broker  to  buy  it  for  him.  This  security 
may  be  a  bond  with  coupons  attached.  The 
purchaser  may  keep  the  bond  at  home  and 
cut  off  the  coupons  as  they  become  due, 
sending  them  to  his  banker,  who  will  exchange 
them  for  money,  and  add  them  to  his  balance 


12  THE  STOCK  EXCHANGE 

at  the  bank.  More  usually  he  will  deposit 
his  security  at  a  bank,  leaving  the  banker 
to  look  after  his  coupons  and  add  them  to  his 
balance  as  they  become  due.  Or  he  may 
have  bought  the  registered  stock  of  some 
public  corporation  or  private  company,  in 
which  case  the  dividend  will  be  sent  him 
regularly  by  post.  The  security,  of  course,  is 
paid  for  by  a  cheque  upon  his  bank,  and  the 
bank  takes  that  sum  from  his  balance  and 
hands  it  over  to  the  broker,  who  buys  the 
security  and  takes  a  small  commission  for 
his  trouble.  A  hundred  years  ago  the  use  of 
the  cheque  was  hardly  understood  even  in 
London,  and  an  English  country  gentleman 
would  have  had  infinitely  more  trouble  in 
making  a  small  investment  than  would  nowa- 
days a  remote  Australian  squatter,  or  a  wheat- 
grower  in  the  wildest  West  of  Canada.  A 
letter  posted  to  London  from  a  distant  village 
of  Saskatchewan  in  1910  would  arrive  with 
far  more  certainty,  and  perhaps  not  less  speed, 
than  a  letter  posted  in  1810  from  a  village  in 
Sutherland  or  Argyllshire.  A  penny  stamp 
with  a  cheque  enclosed  in  a  brief  letter  of  in- 
structions to  the  banker,  and  the  thing  is 
done.  But  the  thrifty  Scot  of  1810  would 
have  had  the  utmost  difficulty,  and  great  ex- 


INTRODUCTION  13 

pense  as  well  as  risk,  in  converting  a  similar 
amount  of  cash  savings  into  an  interest- 
bearing  security.  In  1710  the  thing  would 
have  been  practically  impossible.  The  Bank 
of  England  had  only  just  been  called  into  ex- 
istence, and,  in  fact,  there  were  no  bankers, 
no  brokers,  and  no  Stock  Exchange  in  the 
modern  sense  of  the  word.  A  man  who  wished 
to  invest,  without  personally  employing  his 
capital,  had  practically  no  choice  but  to  buy 
property  and  let  it  out  at  a  rent,  or  lend  his 
money  on  mortgage.  Bank  of  England  Stock 
or  National  Debt  had  just  begun  to  be  a  po- 
litical speculation  for  the  moneyed  Whigs  in 
London.  Merchant  venturers  might  risk  a 
large  sum  in  a  joint-stock  voyage.  Otherwise 
the  average  Englishman  at  the  beginning  of 
the  eighteenth  century  A.D.  was  hardly  better 
off  for  investment  than  the  average  Athenian 
in  the  age  of  Pericles,  or  the  average  Roman 
in  the  days  of  Cicero. 

But  modern  inventions  have  brought  dan- 
gers as  well  as  securities.  There  are  many 
traps  and  pitfalls  for  the  would-be  investor. 
If  by  very  hard  work  a  thrifty  person  saves 
£100  or  £1,000  one  would  expect  him  to  take 
very  good  care  of  it.  He  need  not  be  in  any 
hurry.  It  will  be  perfectly  safe,  yielding  him 


14  THE  STOCK  EXCHANGE 

a  modest  interest,  if  he  deposits  it  in  a  respect- 
able bank  or  in  the  savings  department  of  a 
post-office.  Unfortunately  a  natural  passion 
for  high  interest,  or  the  promise  of  an  in- 
crease in  his  capital  too  often  makes  him 
an  easy  prey  to  some  plausible  rogue.  In  a 
moment  of  weakness  he  draws  a  cheque,  buys 
some  unmarketable  security,  and  the  greater 
part  if  not  the  whole  of  his  hard-earned  sav- 
ings is  irrevocably  lost.  The  wild-cat  prospec- 
tuses, concealed  advertisements  and  inspired 
tips  in  which  so  many  newspapers  abound  are 
so  many  traps  and  pitfalls  for  the  unwary. 

I  have  written  this  little  book  in  the  hope 
that  at  any  rate  a  few  thousands  of  readers 
may  avoid  such  losses,  and  that  some 
hundreds  of  thousands,  perhaps  millions,  of 
pounds,  which  might  have  been  sunk  in  fraud- 
ulent companies,  may  flow  through  honest 
hands  into  sound  securities  and  profitable 
concerns.  Wasteful  expenditure  and  riotous 
living  are  often  truly  described  as  an  ill 
feature  of  our  age  and  country.  But  the 
reckless  waste  of  savings  through  mere  care- 
lessness, stupidity,  or  credulity,  may  be  more 
deplorable  than  the  wasteful  expenditure  of 
income;  for  it  often  involves  helpless  widows 
and  orphans  in  a  wretched  and  unforeseen 


INTRODUCTION  15 

yet  easily  avoidable  poverty.  With  a  little 
attention  and  common  sense  these  miseries 
can  be  guarded  against. 

We  shall  be  concerned  mainly,  as  I  have 
said,  and  as  the  title  of  the  book  implies,  with 
investments  in  Stock  Exchange  securities, 
and  more  especially  in  the  securities  which 
are  bought  and  sold  on  the  London  Stock 
Exchange.  Every  Stock  Exchange  has  its 
own  list  of  securities,  and  only  a  small  number 
of  stocks  are  international  in  the  sense  of 
being  quoted  at  the  same  time  on  the  Ex- 
changes of  London,  Paris,  Berlin,  and  New 
York.  But  London  is  the  banking  and 
financial  centre  of  the  world;  nor  can  any 
territorial  limit  be  set  to  British  investments. 
Our  merchants  and  shippers  seek  profit  in 
every  corner  of  the  globe;  our  investors 
large  and  small  have  interests  in  every  con- 
tinent, and  the  London  Stock  Exchange  List 
is  in  itself  a  sort  of  key  to  the  distribution) 
of  British  trade  and  capital.  Moreover,  an 
English  book  of  this  description  should  ap-; 
peal  directly  to  our  American  kinsmen  in  the  I 
United  States,  to  Canadians,  Australians,  ^ 
and  New  Zealanders  as  well  as  to  the  people! 
now  happily  drawn  together  in  a  United 
South  Africa.  It  will,  therefore,  be  proper 


16  THE  STOCK  EXCHANGE 

within  a  small  compass  to  take  a  wide  view; 
for,  as  Burke  says,  "Great  empires  and  little 
minds  go  ill  together." 

But  while  this  is  the  main  purpose,  I  have 
aimed  incidentally  at  bringing  to  bear  upon 
this  subject  the  teachings  of  history.  The 
stock  markets  of  to-day  are  not  only  more 
interesting  but  far  more  intelligible  if  we  can 
approach  them  with  the  lantern  of  experience 
in  our  hand.  Those  who  understand  a  busi- 
ness or  an  institution  best  are  those  who  have 
made  it  or  grown  up  with  it.  The  next  best 
thing  is  to  learn  how  it  has  grown  up,  and  then 
watch  or  take  part  in  its  actual  working. 

With  some  of  the  opinions  expressed  in 
later  chapters  the  readers  will  often  disagree. 
Many  of  them  are  drawn  less  from  books 
than  from  conversation  and  observation. 
Every  genuine  attempt  to  portray  the  com- 
plex conditions  of  modern  business  life  must 
fail  in  a  greater  or  less  degree.  The  colouring 
will  be  too  bright  here,  and  there  too  sombre. 
Something  material  will  be  left  out.  Some 
expressions  may  be  too  strong,  and  some  fac- 
tors may  be  over-emphasised.  Perhaps  I 
may  be  accused  of  a  certain  bias  in  favour 
of  the  investor  and  of  the  general  public. 
And  this  may  well  be.  At  the  same  time  I 


INTRODUCTION  17 

would  beg  to  assure  the  reader  that  he  and 
I  have  no  better  friends  than  the  numberless 
bankers,  brokers,  dealers,  and  promoters  of 
new  undertakings  who  practise  callings  so 
useful  and  so  indispensable  with  the  highest 
sense  of  honour,  the  most  scrupulous  in- 
tegrity, and  the  most  consummate  ability 
in  the  great  financial  and  commercial  centres 
of  the  world. 


CHAPTER  I 

THE  EARLY   HISTORY   OF  BANKING  AND 
STOCK-JOBBING 

STOCK  EXCHANGE  is  an  honest  word.  It 
means  exactly  what  you  would  expect.  Just 
as  a  Corn  Exchange  is  a  place  where  corn  is 
bought  and  sold,  so  a  Stock  Exchange  is  a 
place  where  stocks  are  exchanged,  or,  if  you 
like,  where  stocks  and  shares  are  bought  and 
sold.  It  is  as  familiar  to  the  modern  business 
world  as  a  bank,  and  in  the  great  commercial 
capitals,  where  credit  and  speculation  are 
focussed,  the  two  are  invariably  found  to- 
gether. In  London  the  Stock  Exchange  lies 
alongside  the  Bank  of  England,  and  round 
them  within  a  quarter  of  a  mile  are  clustered 
hundreds  of  British,  foreign,  and  colonial 
banks,  exchange  houses,  discount  houses, 
and  financial  institutions  of  every  sort  and 
kind.  So  in  New  York.  There  the  great 
banks  and  financial  houses  congregate  about 
Wall  Street  in  a  fashion  that  might  point 

18 


EARLY  HISTORY  19 

rather  to  their  dependence  upon  the  Stock 
Exchange  than  to  the  dependence  of  the 
Stock  Exchange  upon  them.  Wall  Street, 
in  fact,  suggests  a  blend  of  banking  and 
speculation. 

But  two  centuries  ago  there  were  few  banks 
and  no  Stock  Exchanges.  If  we  go  back  only 
a  century  our  London  Stock  Exchange  was 
but  a  struggling  institution,  a  weakling  in  its 
cradle,  despised  and  disliked  by  turns,  often 
threatened  with  extinction  by  an  irate  legis- 
lature. Even  banks  were  only  just  beginning 
to  prove  their  utility,  and  the  true  principles 
of  banking  were  understood  by  few.  Nor  had 
any  country  in  the  world  at  that  time  a  really 
sound  system  of  currency.  The  Bank  of 
England  itself  would  not  and  could  not  give 
five  pounds  for  a  five-pound  Bank  of  England 
note.  Yet  after  1790,  when  the  Bank  of 
Amsterdam  fell  into  disrepute — it  admitted 
its  insolvency  in  1795 — London  had  outdis- 
tanced all  competitors  as  a  disposer  of  capital, 
a  dealer  in  credit  and  a  manager  of  money 
transactions.  In  a  single  century  the  revolu- 
tion has  been  accomplished.  In  this  year  of 
grace  (1911)  there  is  hardly  an  important 
country  except  China — and  even  China  is 
planning  reform — which  would  not  be 


SO  THE  STOCK  EXCHANGE 

ashamed  to  own  such  a  law  and  system  of 
currency  and  banking  as  England  boasted  a 
century  ago,  hardly  a  great  city  in  the  whole 
world  whose  merchants  and  investors  are  not 
better  provided  with  facilities  than  were  the 
wealthy  citizens  of  London  in  1811.  A  con- 
trast so  remarkable  may  well  set  us  thinking 
and  lead  us  towards  an  explanation  of  the 
problem  we  have  to  solve.  For  the  Stock  Ex- 
change does  not  stand  alone;  it  is  not  an  iso- 
lated phenomenon:  it  is  an  item  in  the  cata- 
logue of  progress,  like  the  post  and  the  rail  way, 
the  telegraph  and  the  telephone.  Material 
progress  and  advancement  are  made  up  of 
many  parts  all  hanging  together.  Banks  and 
Stock  Exchanges  are  the  outward  and  visible 
signs  of  a  wonderful  improvement  in  money 
and  credit.  But  they  could  not  possibly  be 
what  they  are  without  one  another,  or  without 
a  hundred  other  inventions.  For  example, 
what  would  a  bank  or  a  Stock  Exchange  be 
without  a  post-office?  And  what  would  a 
post-office  be  without  railways,  steamers,  and 
telegraphs?  And  how  could  we  have  had  rail- 
ways and  telegraphs  if  steam  power  and  elec- 
tricity had  not  been  discovered  and  applied? 
But,  though  the  wonderful  inventions  that 
have  made  the  modern  system  of  rapid  travel 


EARLY  HISTORY  21 

and  instantaneous  communication  are  re- 
sponsible for  an  equally  wonderful  system  of 
international  commerce  and  finance,  I  do  not 
pretend  that  a  Stock  Exchange  would  be  im- 
possible without  the  railway  and  the  tele- 
graph. In  fact,  the  London  Stock  Exchange 
was  founded  before  either  was  known.  All 
that  is  really  necessary  to  make  a  Stock  Ex- 
change is  a  sufficient  quantity  of  stocks  and 
shares  and  a  sufficient  number  of  investors  or 
speculators  desirous  of  buying  and  selling  this 
sort  of  commodity.  Indeed  the  philosopher, 
looking  back  to  the  civilisation  of  ancient 
Greece  and  Rome,  may  well  wonder  why, 
with  their  baths,  their  theatres,  their  courts 
of  law,  their  shops  and  markets  and  banks, 
Athens  and  Rome  never  invented  or  possessed 
a  Stock  Exchange.  But  this  is  only  another 
way  of  expressing  surprise  that  the  convenient 
device  of  translating  capital  and  debts  into 
terms  of  interest-bearing  paper  was  not  in- 
vented until  comparatively  recent  times.  If 
the  scheme  proposed  by  Xenophon  for  a  sort 
of  joint-stock  bank  at  Athens  had  been 
adopted,  it  might  easily  have  led  to  the 
foundation  of  a  Stock  Exchange. 

Interest-bearing  paper,  in  the  sense  of  Stock 
Exchange  securities,  was  part  of  a  contrivance 


22  THE  STOCK  EXCHANGE 

of  the  moneyed  interest  to  finance  the  Con- 
(/  tinental  wars  of  William  of  Orange.  But 
William's  was  not  the  first  needy  Government 
that  would  have  welcomed  any  plan  for 
relieving  its  necessities  at  the  expense  of 
posterity. 

Money,  of  course,  and  money-lending  can 
be  traced  back  far  beyond  the  Christian  era. 
Athenian  lawyers  in  the  days  of  Demosthenes 
argued  about  mortgages  on  land  and  ships. 
But  an  investor  could  not  buy  a  share  in  a 
company  or  lend  money  to  the  State  by  put- 
ting a  talent  into  Greek  bonds.  There  were 
no  Italian  rentes  for  a  Roman  citizen  to  buy 
with  a  bag  of  coins  bearing  Csesar's  image 
and  inscription. 

It  may  well  be  asked  why  the  world  made 
no  steady  progress  in  wealth  until  the  eight- 
eenth century,  and  why  since  then,  in  spite 
of  wars  and  armaments,  plagues  and  famines, 
earthquakes  and  conflagrations,  capital  has 
accumulated  at  an  ever-increasing  rate.  I  am 
inclined  to  think  that  among  the  various  con- 
tributory causes  an  improvement  of  money, 
^  a  development  of  credit,  and  a  multiplication 
of  investments  (three  closely  connected  facts) 
have  played  a  decisive  part.  The  establish- 
ment of  sound  and  honest  money  comes  first; 


EARLY  HISTORY  23 

for  without  this  there  can  be  no  confidence, 
and  without  confidence  trade  cannot  flourish 
and  wealth  cannot  accumulate. 

When  Europe  began  to  wake  from  the  dark 
centuries  that  followed  the  fall  of  the  Roman 
Empire,  Italy  took  the  lead  not  only  in  the 
renaissance  of  art  and  learning,  but  also  in 
commerce.  The  Bank  of  Venice  is  supposed 
to  have  been  founded  in  1157.  In  the  four- 
teenth century  the  Florentines  forged  ahead, 
and  the  Bank  of  the  Medici  became  the 
financial  centre  of  what  little  financial  inter- 
course and  commerce  then  existed  between 
the  principal  nations.  In  1401  a  bank  was 
founded  at  Barcelona,  and  in  1407  the 
Republic  of  Genoa,  being  embarrassed  by  a 
multitude  of  loans,  consolidated  them  into  a 
"mountain"  (monte)  and  made  this  heap  of 
debt  the  capital  of  a  bank  which  was  placed 
under  the  management  of  eight  directors 
elected  by  the  holders  of  the  debt  or  stock. 
Various  cities  and  territories  belonging  to 
Genoa  were  made  over  to  the  bank  as  secur- 
ity for  the  debt.  The  fame  and  success  of  the 
Italian  banks  led  to  the  foundation  of  small 
lending  houses  in  other  countries  by  Lombard 
merchants.  Quite  a  number  settled  in  Lon- 
don, and  gave  their  name  to  Lombard  Street. 


«4  THE  STOCK  EXCHANGE 

As  the  Italian  cities  declined  those  of  Ger- 
many and  Northern  Europe  rose,  and  the 
Hanseatic  League  flourished  during  the  fif- 
teenth and  sixteenth  centuries.  Then  Holland 
shook  off  the  Spanish  yoke  and  forged  a  new 
link  between  freedom  and  wealth.  The  fa- 
mous Bank  of  Amsterdam  was  founded  in 
1609.  Its  prime  purpose  was  to  provide  a 
good  mercantile  currency  to  remedy  the  evils 
of  worn  and  clipped  coins,  which  harassed 
merchants  everywhere  and  embarrassed  spe- 
cially the  trade  between  Holland  and  other 
countries.  Already  the  Dutch  were  becom- 
ing the  principal  carriers  and  merchants  of 
Northern  Europe.  The  bank  established  this 
predominance.  It  received  bad  coins  at  very 
nearly  their  intrinsic  value,  issuing  coin  of 
standard  weight  and  fineness  in  return.  At 
the  same  time  it  was  enacted  that  all  foreign 
bills  of  exchange  drawn  upon,  or  negotiated 
at,  Amsterdam  of  the  value  of  more  than  600 
guilders  should  be  paid  in  bank  money.  Thus 
the  value  of  bills  on  Holland  was  raised 
abroad,  and  foreign  merchants  found  it  con- 
venient to  keep  an  account  at  the  Bank  of 
Amsterdam,  so  that  they  might  have  legal 
money  to  buy  foreign  bills.  The  bank  was 
the  property  of  the  city  and  was  under  the 


EARLY  HISTORY  25 

control  of  four  burgomasters.  It  was  founded 
on  the  principle  of  providing  good  money  for 
the  finance  of  foreign  trade  in  the  freest  and 
most  prosperous  commercial  port.  It  was  also 
a  bank  of  deposit,  and  as  such  carried  to  con- 
siderable perfection  the  principle  of  written 
transfer.  Any  person  who  chose  to  lodge 
money  in  the  bank  might  transfer  it  from 
his  own  name  to  that  of  another;  and  the 
law,  as  we  have  seen,  required  foreign  bills  of 
exchange  to  be  paid  by  such  transfers.  The 
device  is  really  the  same  as  that  by  which  a 
business  transaction  between  two  persons  who 
have  accounts  at  the  same  bank  is  now  settled. 
One  draws  a  cheque  in  favour  of  the  other. 
The  amount  of  money  at  the  bank  remains 
the  same,  but  some  of  it  is  transferred  in  the 
bank's  book  from  the  name  of  the  customer 
who  drew  the  cheque  to  that  of  the  other  who 
endorsed  it.  Thus  there  is  a  transfer  of  money 
without  any  actual  movement  of  cash. 

The  Bank  of  Amsterdam  flourished  for  a 
hundred  and  fifty  years.  Its  fall  was  brought 
about  by  the  misconduct  of  its  directors, 
preceded  and  followed  by  a  relative  decline 
in  the  commerce  of  Holland,  which  yielded 
to  the  growing  strength  and  wealth  of  Eng- 
land. In  one  of  the  most  instructive  digres- 


26  THE  STOCK  EXCHANGE 

sions  of  his  great  masterpiece,  The  Wealth  of 
Nations,  Adam  Smith  explains  how  the  money 
current  in  small  commercial  city  states  like 
Amsterdam,  Hamburg,  and  Nuremburg  con- 
sisted largely  of  foreign  coins,  many  of  them 
worn  and  debased,  and  how,  in  order  to  rem- 
edy the  inconveniences  of  these  exchanges, 
banks  were  originally  established  in  these 
and  other  cities,  which  came  in  time  to  serve 
wider  purposes.  But  larger  and  more  self- 
contained  countries,  like  England  and  France, 
which  then  depended  but  little  upon  foreign 
commerce,  were  more  troubled  by  the  de- 
fects of  their  own  currencies  than  by  the  bad 
coin  of  their  neighbours.  And  so  the  Bank 
of  England  originated  not  so  much  from 
external  necessities  or  the  requirements  of 
foreign  trade  as  from  the  needs  of  Govern- 
ment and  reasons  of  State. 

England,  indeed,  had  at  first  made  but  slow 
progress  in  the  arts  of  economising  money  and 
manufacturing  credit.  The  profitable  busi- 
ness of  money-changing  was  monopolised  by 
Henry  the  First,  John,  Edward  the  Third, 
and  some  of  their  successors,  who  established 
the  office  of  Royal  Exchanger  in  London  at 
Old  Change  near  St.  Paul's  and  in  other 
towns.  This  official  had  the  exclusive  privi- 


EARLY  HISTORY  27 

lege  of  exchanging  gold  coins  for  silver,  and 
foreign  for  English  money.  The  king  farmed 
out  the  office,  or  shared  in  the  profits,  and  the 
office  in  each  town  was  called  the  Exchange, 
a  name  still  attached  to  many  of  the  covered 
markets  where  merchants  meet  to  buy  and 
sell  and  speculate  in  particular  commodities 
such  as  wrool,  cotton,  corn,  as  well  as  in  stocks 
and  shares.  The  office,  which  had  fallen  into 
disuse,  was  revived  by  a  proclamation  of 
Charles  the  First,  much  to  the  dissatisfaction 
of  the  goldsmiths,  who  had  been  making  good 
profits  by  culling  out  heavy  coins  for  melting 
or  for  sale  to  the  Dutch  mint.  The  Gold- 
smiths' Company  and  the  Common  Council 
appealed  in  vain  against  this  ordinance;  but 
after  the  Commonwealth  was  established  the 
business  of  money-changing  fell  again  into 
the  hands  of  the  goldsmiths.  Another  trade, 
that  of  money-lending,  was  monopolised  by 
the  Jews  from  the  Conquest  until  their  expul- 
sion in  1290,  when  the  Lombards  succeeded 
to  the  craft  and  proved  equally  usurious,  their 
rates  being  proportioned  to  their  risks.  There 
was  also  a  legal  rate  of  interest — 10  per  cent, 
from  1571  to  1624,  then  8  till  1651,  and 
6  till  1714,  after  which  it  was  fixed  at  5 
for  England,  and  6  for  Ireland.  The  term 


28  THE  STOCK  EXCHANGE 


"usury"  denoted  any  rate  of  interest  above 
that  which  the  law  sanctioned  and  enforced. 
After  Charles  the  First's  time  the  goldsmiths 
became  the  principal  lenders  and  dealers  in 
money,  though  reinforced  by  the  Jews  whom 
Cromwell  readmitted  to  England.  Then, 
as  Gilbart,  our  leading  authority  on  English 
banking,  explains,  a  new  era  began  in  the 
history  of  banking.  "The  goldsmiths,  who 
were  previously  only  money-changers,  now 
became  also  money-borrowers,  and  allowed 
interest  on  the  sums  they  borrowed.  They 
were  agents  for  receiving  rents.  They  lent 
money  to  the  king  on  the  security  of  the  taxes. 
The  receipts  they  issued  for  the  money  lodged 
at  their  houses  circulated  from  hand  to  hand, 
and  were  known  by  the  name  of  Goldsmiths' 
Notes.  These  may  be  considered  as  the  first 
kind  of  bank-notes  issued  in  England."  The 
banking  goldsmiths  made  way  rapidly,  and 
attracted  large  quantities  of  cash,  which 
enabled  them  to  advance  money  to  Cromwell 
and  Charles  the  Second  at  high  rates  in  ad- 
vance of  the  revenues .  These  ' '  new-fashioned 
bankers  "  were  sharply  criticised  by  the  pam- 
phleteers, and  even  by  Sir  Josiah  Child,  for 
draining  away  money  from  the  country  to 
London  and  preventing  its  investment  in 


EARLY  HISTORY  29 

land.  Here,  in  fact,  we  have  a  small  begin- 
ning of  the  modern  system  of  investment  by 
deposit  in  banks.  After  the  Restoration,  it 
is  written,  "King  Charles  the  Second  being 
in  want  of  money,  these  goldsmith  bankers 
took  10  per  cent,  of  him  barefacedly  and  by 
private  contracts.  On  many  bills,  orders, 
tallies  and  debts  of  that  king  they  got  20, 
sometimes  30  per  cent,  to  the  great  dis- 
honour of  the  Government."  In  1667,  when 
the  Dutch  fleet  sailed  up  the  Thames,  set  fire 
to  Chatham,  and  burnt  four  ships  of  the  line, 
there  occurred  the  first  recorded  "run"  on 
our  banks.  The  alarm  was  allayed  by  a  royal 
proclamation  promising  that  the  payments 
to  the  bankers  should  be  made  as  usual  from 
the  Exchequer.  But  in  1672  the  Exchequer 
was  closed  and  the  king  repudiated  a  debt 
of  £1,328,526  which  he  had  borrowed  of  the 
goldsmiths  at  8  per  cent.  This  shameless  act 
caused  wide  distress.  "Not  merchants  only, 
but  widows,  orphans  and  others  became  sud- 
denly deprived  of  the  whole  of  their  property. 
They  came  in  crowds  to  the  bankers,  but 
could  obtain  neither  the  principal  nor  the 
interest  of  the  money  they  had  deposited." 
Ultimately  the  king  compounded  after  the 
manner  of  Central  American  Republics.  He 


SO  THE  STOCK  EXCHANGE 

refused  to  repay  the  principal,  but  granted  a 
patent  to  pay  6  per  cent,  interest  out  of  his 
hereditary  excise.  Then  after  six  years  he 
again  suspended  payment.  This  Goldsmiths' 
Debt,  or  Bankers'  Debt,  was  reconsidered  in 
the  years  following  the  Revolution.  After 
some  litigation  the  claims  of  the  creditors 
were  partially  recognised.  A  settlement  was 
reached  in  1705,  the  Government  agreeing  to 
pay  3  per  cent,  (about  half  the  market  rate) 
on  the  capital  with  the  right  to  discharge  the 
whole  at  any  time  by  payment  of  one  half 
the  amount  originally  lent. 

We  are  now  brought  to  the  foundation  of 
the  Bank  of  England,  which  coincides  with 
the  first  chapter  in  the  English  History  of 
Stocks  and  Stock  Jobbing — a  development 
much  hated  by  the  old  Jacobites  and  Tories. 
They  called  it  "Dutch  finance,"  and  their 
prejudice  was  justified  partly  by  political, 
partly  by  economic,  and  partly  by  moral 
considerations.  Politically  they  hated  the 
Bank  and  the  Stock  which  it  issued,  because 
it  supplied  the  Government  with  money;  for 
the  Government  was  the  Whig  Government, 
standing  between  the  country  and  the  return 
of  the  Stuarts.  Economically  they  disliked 
both  Bank  and  Debt,  because  easy  borrowing 


EARLY  HISTORY  SI 

meant  heavy  expenditure  on  war,  and  an 
increase  of  taxes,  principally  on  land,  to  pay 
the  growing  interest  on  the  debt.  Morally 
and  socially  they  hated  the  new  "Dutch" 
-finance,  because  it  stimulated  speculation,  * 
and  increased  the  power  of  London  and  of  the 
moneyed  interest  at  the  expense  of  the  coun- 
try gentlemen.  But  the  new  system  with  all 
its  evils  had  come  to  stay,  and  was  destined 
not  only  to  make  many  fortunes  and  bank- 
ruptcies, but  also  to  give  a  marvellous  im- 
petus to  the  growth  of  credit,  trade  and 
capital.  What  happened  has  been  often  told, 
and  for  our  purpose  it  is  enough  to  retell  the 
story  very  briefly. 

During  the  seventeenth  century  our  kings 
generally  borrowed  by  means  of  Exchequer 
tallies,  which  were  acknowledgments  of  sums 
paid  by  private  lenders  to  the  Exchequer. 
The  tally  was  a  willow  stick  four  or  five  feet 
long  and  about  one  inch  square.  There  were 
notches  on  one  side  to  express  the  amount  of 
the  debt,  and  identical  descriptions  of  the 
payment  were  written  on  two  of  the  three 
vacant  sides.  The  stick  was  split  in  half 
through  the  notches.  One  half  was  given  to 
the  person  making  payment  into  the  Ex- 
chequer; the  other  half  of  the  counter  tally, 


32  THE  STOCK  EXCHANGE 

or  counter  foil,  was  kept  at  the  Exchequer  as 
a  check.  Here,  it  will  be  seen,  we  have  at 
once  the  origin  of  the  modern  cheque  system 
of  our  banks;  and  in  the  United  States  the 
early  spelling  of  "check"  is  still  adhered  to. 
There  were  two  kinds  of  tallies — Tallies  of 
Pro  and  Tallies  of  Sol.  The  Tallies  of  Pro 
were  like  a  modern  cheque  on  a  banker,  and 
served  as  a  voucher  to  the  holder  at  the  Ex- 
chequer of  account.  This  Tally  was  so  called 
because  it  was  struck  "Pro,"  i.  e.  for  the  bene- 
fit of  the  person  named.  Tallies  of  Sol  were 
acknowledgments  of  sums  paid  (solutum) 
into  the  Exchequer,  and  were  issued  when 
loans  were  raised  from  the  public;  while 
Tallies  of  Sol  (as  Mr.  Joseph  Burn  points  out 
in  his  excellent  lectures  on  "Stock  Exchange 
Investments")  came  into  play  when  public 
subscriptions  were  not  forthcoming,  being 
issued  in  lieu  of  cash  for  the  payment  of  ordi- 
nary disbursements  by  the  Government. 
The  Tally  system  was  not  abolished  till  1783, 
and  served  the  purpose  of  modern  Treasury 
bills  enabling  the  Government  to  borrow 
small  sums  for  short  periods.  But  the  action 
of  Charles  the  Second  in  repudiating  the 
Goldsmiths'  Debt  naturally  made  tallies  sus- 
pect, and  increased  the  difficulty  of  borrow- 


EARLY  HISTORY  33 

ing.  Hence  after  the  Revolution  the  Parlia- 
ment of  William  had  to  find  money  for  foreign 
wars  by  other  methods,  and  in  1692  a  million 
was  raised  by  life  annuities. 

In  1694  the  Bank  of  England  was  founded. 
It  was  the  project  of  William  Paterson,  a 
clever  but  speculative  Scot,  who  afterwards 
came  to  grief  in  the  Darien  enterprise.  It  was 
the  first  of  our  Joint-Stock  Banks,  and  though 
not  the  first  of  our  Joint-Stock  Companies  it 
gave  the  first  opportunity  for  general  dealings 
in  Stocks  and  Shares.  The  scheme  com- 
mended itself  to  Montagu — a  Whig  statesman 
of  great  financial  ability — as  a  means  of 
raising  money;  and  the  Government  granted 
a  charter  to  the  Bank  on  condition  that  the 
Bank  should  lend  the  whole  of  its  original 
capital  (£1,200,000)  to  the  Government,  re- 
ceiving in  return  (1)  £96,000  annually,  i.  e. 
8  per  cent,  interest  plus  £4,000  for  manage- 
ment, (2)  the  right  to  issue  notes  to  the  extent 
of  £1,200,000  and  (3)  the  right  to  do  banking 
business.  In  plan,  therefore,  and  original  pur- 
pose the  Bank  of  England  resembles  the  Bank 
of  Genoa  rather  than  the  Bank  of  Amsterdam. 
At  first  all  went  well.  The  tallies,  which  had 
been  at  a  heavy  discount,  soon  rose  to  par. 
But  in  1696  the  Bank  failed  in  an  attempt 


34  THE  STOCK  EXCHANGE 

to  carry  out  a  recoinage,  the  currency  then 
being  in  a  very  bad  state.  A  suspension  of 
payments  followed  with  a  depreciation  of 
bank  notes  and  Exchequer  tallies;  but  the 
Bank's  credit  was  restored  with  the  aid  of  the 
Government.  In  the  following  year  the  Gov- 
ernment had  to  borrow  another  million,  which 
was  added  to  the  Bank's  capital  with  a  cor- 
responding increase  of  the  note  issue. 

In  spite  of  the  enmity  of  private  banks  the 
Bank  of  England  was  well  supported  by  the 
moneyed  interest.  Its  early  issues  were  fully 
subscribed,  and  in  1709,  when  the  capital  was 
doubled,  the  whole  of  the  new  stock — over 
two  millions,  was  issued  at  a  premium  of  15 
per  cent,  and  subscribed  in  four  hours. 

The  National  Debt  meanwhile  was  grow- 
ing in  various  ways.  In  1698  the  New  East 
India  Company  received  a  charter  on  the  con- 
dition that  its  capital  was  lent  to  the  Govern- 
ment. By  1711  the  funded  Debt  had  grown 
to  £11,750,000,  all  of  which  was  held  by 
public  investors  as  annuities,  bank  stock, 
East  India  Stock,  etc.,  at  various  rates  of  in- 
terest. But  there  was  also  a  huge  unfunded 
debt  which  had  grown  to  9  millions  in  1710. 
A  new  Joint-Stock  Company  called  the  South 
Sea  Company  was  promoted  with  the  aid  of 


EARLY  HISTORY  35 

Harley  and  St.  John  to  take  over  this  Debt. 
In  return  for  this  it  was  granted  trading 
privileges,  and  to  provide  interest  on  its 
9  millions  of  capital  stock  the  Government 
assigned  various  duties  on  wine,  and  beer  and 
tobacco,  etc.  For  ten  years  the  company 
engaged  in  the  African  Ocean  trade  and  other 
commercial  ventures  with  little  success.  Then 
Sir  John  Blunt — one  of  the  directors,  a  cun- 
ning and  plausible  scrivener,  hatched  another 
scheme,  and  by  corrupt  means  won  over 
Aislabie  the  Chancellor  of  the  Exchequer, 
and  various  other  ministers  and  members  of 
Parliament.  The  idea  was  taken  from  the 
famous  Mississippi  Company  scheme  of  Law, 
which  had  burst  over  France  with  such 
disastrous  ruin  a  year  before.  Undeterred 
by  this  example,  Blunt  boldly  offered  to  take 
over  the  whole  National  Debt,  amounting 
to  31  millions,  if  the  Government  would 
guarantee  5  per  cent,  interest  for  seven  years 
and  4  per  cent,  thereafter  in  perpetuity.  For 
some  time  the  Bank  of  England  and  the  South 
Sea  Company  bid  against  each  other  for  the 
favour  of  the  Government,  but  eventually  the 
company's  offer  was  accepted.  The  company 
then  opened  its  first  subscription  of  a  million 
in  £100  stock  at  £300.  Blunt  opportunely 


36  THE  STOCK  EXCHANGE 

circulated  a  report  that  Gibraltar  and  Port 
Mahon  would  be  exchanged  with  Spain  for 
some  places  in  Peru,  whereby  the  South  Sea 
trade  would  be  protected  and  enlarged. 
Persons  of  all  ranks  crowded  to  South  Sea 
House,  and  the  stock  went  off  like  hot  cakes. 
This  was  in  April.  By  midsummer  there  was 
a  second,  and  then  a  third  subscription, 
accompanied  by  promises  of  more  and  more 
prodigious  dividends.  The  city  went  mad; 
stock-jobbers  ran  from  coffee-house  to  coffee- 
house inviting  subscriptions  to  the  great 
bubble  and  to  little  bubble  companies  of  all 
descriptions.  It  was  the  first  joint-stock 
mania.  "All  distinction  of  party,  religion, 
sex,  character,  and  circumstances,"  writes 
Smollett,  the  historian  of  the  time,  "were 
swallowed  up  in  this  universal  concern.  Ex- 
change Alley  was  filled  with  a  strange  con- 
course of  statesmen  and  clergymen,  church- 
men and  dissenters,  Whigs  and  Tories,  physi- 
cians, lawyers,  tradesmen,  and  even  with  mul- 
titudes of  females.  All  other  possessions  and 
employments  were  utterly  neglected;  and 
the  people's  attention  wholly  engrossed  by 
this  and  other  chimerical  schemes,  which  were 
known  by  the  denomination  of  bubbles. 
New  companies  started  up  every  day,  under 


EARLY  HISTORY  37 

the  countenance  of  the  prime  nobility.  The 
Prince  of  Wales  was  constituted  Governor 
of  the  Welsh  copper  company:  the  Duke  of 
Chandos  appeared  at  the  head  of  the  York 
buildings  company:  the  Duke  of  Bridgewater 
formed  a  third,  for  building  houses  in  London 
and  Westminster.  About  a  hundred  such 
schemes  were  projected  and  put  in  execution, 
to  the  ruin  of  many  thousands.  The  sums 
proposed  to  be  raised  by  these  expedients 
amounted  to  three  hundred  millions  sterling, 
which  exceeded  the  value  of  all  the  lands  in 
England.  The  nation  was  so  intoxicated  with 
the  spirit  of  adventure,  that  people  became 
a  prey  to  the  grossest  delusion.  An  obscure 
projector,  pretending  to  have  formed  a  very 
advantageous  scheme,  which,  however,  he  did 
not  explain,  published  proposals  for  a  sub- 
scription in  which  he  promised  that  in  one 
month  the  particulars  of  his  project  should 
be  disclosed.  In  the  meantime  he  declared 
that  every  person  paying  two  guineas  should 
be  entitled  to  a  subscription  for  one  hundred 
pounds,  which  would  produce  that  sum 
yearly.  In  one  forenoon  this  adventurer  re- 
ceived a  thousand  of  these  subscriptions;  and 
in  the  evening  set  out  for  another  kingdom." 
The  third  South  Sea  subscription  was 


38  THE  STOCK  EXCHANGE 

£1,000  for  £100  stock,  and  £2,000  was 
touched  before  September,  when  the  stock 
began  to  fall.  By  September  29  it  had  sunk 
to  £150.  Several  eminent  bankers  and  gold- 
smiths, who  had  lent  great  sums  on  it,  were 
forced  to  stop  payment  and  abscond.  "The 
dbb  of  this  portentous  tide  was  so  violent  that 
it  bore  down  everything  in  its  way;  and  an 
immense  number  of  families  were  over- 
whelmed with  ruin."  Walpole  called  in  the 
aid  of  the  Bank,  but  its  resources  were  un- 
equal to  the  emergency.  The  king  was  sum- 
moned back  from  Hanover;  Parliament  was 
assembled,  and  Walpole  laid  before  it  a  wise 
scheme  for  restoring  the  public  credit.  So  the 
curtain  closed  on  this  strange  scene  of  national 
infatuation. 

But  it  must  be  said,  for  the  credit  of  Parlia- 
ment, that  a  thorough  inquiry  was  instituted 
and  some  severe  punishments  meted  out.  In 
the  salutary  reaction  that  followed,  the  Brit- 
ish public  began  to  appreciate  the  value  of 
gilt-edged  securities,  and  the  British  Govern- 
ment, under  the  prudent  guidance  of  Walpole, 
practised  peace  and  economy.  The  public 
credit  responded  marvellously.  In  Queen 
Anne's  reign  6  per  cent,  had  been  the  usual 
rate  of  interest  on  public  loans.  Within  six 
years  of  the  bubble — in  1726 — a  3  per  cent. 


EARLY  HISTORY  39 

Government  stock  in  £10  lottery  tickets  was 
issued  at  par,  and  actually  sold  up  to  107  in 
1739.  In  the  wars  with  Spain  and  France 
(1740-1747)  30  millions  more  in  new  loans  at 
various  rates  were  added  to  the  National 
Debt;  but  in  the  ensuing  peace  credit  speed- 
ily revived,  and  in  1749  a  successful  scheme  of 
conversion  was  effected  by  which  the  interest 
on  the  greater  part  of  the  debt  was  reduced 
to  3  per  cent. 

Two  funds  were  established,  one  being 
called  the  3  per  cent,  consolidated  annuities. 
Thus  were  created  the  world-famed  British 
"Consols"  (i.  e.  consolidateds)  which,  through 
many  fluctuations  of  credit,  retained  "the 
sweet  simplicity  of  3  per  cent."  for  more 
than  a  century.  After  a  short  interval  of 
peace  London's  stock  and  share  markets  were 
again  flooded  with  Government  paper  by 
the  Seven  Years'  War  (1756-1763)  which 
added  54  millions  to  the  National  Debt  in 
lottery  loans,  bearing  interest  at  3,  3|,  and 
4  per  cent,  apart  from  the  prizes.  During  the 
succeeding  peace  some  debt  was  paid  off,  and 
some  was  converted  from  4  per  cent,  to  3 
per  cent.  But  in  1776  the  long  war  of  Ameri- 
can Independence  broke  out,  and  ten  years 
later,  when  its  financial  consequences  became 


40  THE  STOCK  EXCHANGE 

clear,  the  National  Debt  was  found  to  have 
been  nearly  doubled,  having  increased  from 
128  to  244  millions,  while  the  charge  for  in- 
terest had  more  than  doubled,  having  risen 
from  £4,471,000  to  £9,302,000. 

At  the  Peace  of  Versailles,  in  1783,  the 
funded  debt  consisted  of  £107,000,000,  3  per 
cent,  consols,  £37,000,000  3  per  cent,  reduced, 
£32,000,000  Four  per  cents.,  and  £17,000,000 
Fives,  while  a  further  42  millions  was  owing 
to  the  Bank,  to  the  East  India  and  South  Sea 
Companies,  and  to  the  Civil  List.  After 
another  breathing  space  the  country  was 
launched  upon  the  most  disastrous  and  ter- 
rible of  all  our  wars,  the  war  of  the  French 
Revolution.  Just  before  its  commencement 
in  1793  the  Funded  Debt  amounted  to  about 
228  millions  with  an  interest  charge  of  about 
7f  millions,  and  the  unfunded  or  floating  debt 
was  16  millions,  with  an  interest  charge  of  just 
under  half  a  million.  At  the  conclusion  of 
peace  in  1815,  according  to  the  computation 
of  Robert  Hamilton,  the  National  Debt  had 
run  up  to  the  appalling  total  of  758  millions 
and  the  charge  for  interest  and  annuities  was 
£27,652,000.  No  wonder  that  in  this  last 
period  the  London  Stock  Exchange  had  be- 
come an  important  institution,  or  that  great 


EARLY  HISTORY  41 ' 


fortunes  had  been  made  by  contractors  and 
loan-mongers  of  all  descriptions.  No  wonder 
either  that  the  country  was  submerged  in 
pauperism  and  its  Government  fast  approach- 
ing a  state  of  bankruptcy. 

From  this  brief  account  of  the  National 
Debt,  which  must  have  absorbed  a  very  great 
part  of  the  National  Savings  from  1700  up 
to  the  year  1815,  we  may  return  to  Stock 
Jobbing,  with  which,  as  has  been  seen,  the 

|  origin  and  expansion  of  our  national  war 
loans  are  so  intimately  and  even  inseparably 
associated.  It  has  been  shown  how  during 
the  South  Sea  Bubble  speculation  ran  through 

!  all  ranks  of  London  Society.    But  the  boom 

'  in  South  Sea  Stock  had,  as  it  were,  a  gilt- 
edged  basis  in  the  favour  and  support  of  the 
Government.  Harley,  as  Chancellor  of  the 
Exchequer,  had  been  Governor,  and  one  of 
the  original  directors  was  St.  John  (Viscount 
Bolingbroke).  In  the  huge  swindle  of  1720 

|Aislabie,  the  Chancellor  of  the  Exchequer, 
and  Lord  Sunderland,  who  represented  the 
Ministry  in  the  House  of  Lords,  were  deeply 
implicated.    No  wonder,  then,  that  rank  and 
fashion  led  that  wild  rush  of  speculators  to 
Change  Alley.    A  ballad-monger  of  the  time  , 
tells  how  the  stars  and  garters  vied  with  the  j 
meaner  rabble — 


4*  THE  STOCK  EXCHANGE 

"To  buy  and  sell,  to  see  and  hear 
The  Jews  and  Gentiles  squabble," 

and  how  "the  greatest  ladies" 

"Plied  in  chariots  daily, 
Or  pawned  their  jewels  for  a  sum 
To  venture  in  the  Alley." 

In  the  reaction  that  followed  stock-job- 
bing suffered  discredit;  but  it  was  a  genuine 
profession,  meeting  a  new  and  genuine  need. 
The  public  debt  proved  to  be  unextinguish- 
able :  the  public  funds  grew  so  fast  and  fluctu- 
ated so  rapidly  under  the  influence  of  wars 
and  rumours  of  wars  that  the  quick-witted 
gentry  of  Change  Alley  and  the  coffee-houses 
found  plenty  of  occupation.  Private  banks 
and  joint-stock  companies  were  also  multiply- 
ing. Even  during  the  mushrooii  growths  of 
the  South  Sea  Boom  two  sound  insurance 
companies  which  still  exist — the  London  As- 
surance Corporation  and  the  Royal  Exchange 
Assurance — found  recognition  and  capital. 
It  may  be  asked  where  all  the  money  came 
from.  The  answer  is  to  be  found  in  the  fact, 
upon  which  we  have  been  insisting,  that  these 
new  interest-bearing  securities  gave  employ- 
ment to  wealth  that  had  previously  lain  idle. 
The  practice  of  hoarding  is  not  easily  extir- 


EARLY  HISTORY  43 

pated,  and  only  yields  to  the  gradual  growth 
of  confidence  in  the  credit  of  Government,  of 
banks,  of  brokers,  and  of  established  com- 
panies. It  says  much  for  the  statesmen,  the 
merchants,  the  bankers,  and  even  the  Stock- 
jobbers of  eighteenth  century  London  that 
money  came  out  so  freely  in  this  very  first 
epoch  of  investment.  At  the  Revolution  one 
fugitive  is  said  to  have  carried  his  fortune 
of  £20,000  away  with  him  in  a  strong  box. 
A  generation  later  he  would  have  taken  it  in 
bank-notes  or  negotiable  stock. 

The  jobbers  were  long  in  housing  them- 
selves. At  first  they  frequented  the  Royal 
Exchange  and  the  Rotunda  of  the  Bank,  then 
the  coffee-houses  and  the  streets — Cornhill, 
Lombard  Street  and  especially  Change  Alley 
and  Sweetings  Alley.  Old  Jonathan's  Coffee- 
house was  a  favourite  resort  for  those  who  pre- 
ferred indoor  comfort  to  the  rough  and  tumble 
and  exposure  of  Change  Alley.  It  was  burnt 
down  in  1748.  But  New  Jonathan's  took  its 
place,  and,  in  July  1773,  "the  brokers  and 
others  at  New  Jonathan's  came  to  a  resolution 
that,  instead  of  its  being  called  New  Jona- 
than's it  should  be  called  The  Stock  Exchange, 
which  is  to  be  wrote  over  the  door."  From 
this  time  London  may  be  said  to  have  pos- 


44  THE  STOCK  EXCHANGE 

sessed  a  Stock  Exchange  in  the  modern  sense, 
though  much  business  in  the  public  funds  was 
still  transacted  at  the  Bank,  and  dealings  in 
foreign  securities  still  centred  in  the  Royal 
Exchange.  The  members  of  Jonathan's  paid 
a  small  subscription  and  eventually  drew  up 
rules,  and  appointed  a  committee  of  manage- 
ment. But  daily  admission  could  be  gained 
by  a  payment  of  sixpence.  At  length  the 
membership  of  brokers  and  jobbers  outgrew 
the  accommodation,  and  at  the  end  of  the 
eighteenth  century  it  was  determined  to  pro- 
vide new  quarters.  A  building  was  erected 
close  to  the  Bank  of  England,  in  Capel  Court, 
and  opened  in  March  1802  with  a  membership 
of  about  five  hundred.  But  this  belongs  to 
our  next  chapter.  Here  it  only  remains  to 
add  that  the  first  Stock  Exchange  book  was 
published  in  1761.  Its  title  ran:  Every  man 
his  own  broker,  or  a  Guide  to  Exchange  Alley. 
The  author,  J.  Mortimer,  was  an  economist  of 
some  merit.  He  had  been  British  Consul  in 
Holland  and  had  seen  the  workings  of  the 
Amsterdam  Bourse  and  the  arbitrage  business 
between  London  and  Amsterdam,  which  was 
already  considerable  in  the  middle  of  the 
eighteenth  century;  for  the  Dutchmen  were 
fond  of  speculating  in  the  London  market. 


EARLY  HISTORY  45 

Mortimer  seems  to  have  lost  money  in  stocks, 
and  the  main  purpose  of  his  book  is  to  warn 
the  investing  public  and  the  Government 
against  the  jobbers.  He  therefore  gives 
minute  instructions  to  would-be  investors  in 
Government  funds,  showing  them  how  to  deal 
directly  with  the  officials  at  the  Bank  of  Eng- 
land. We  shall  have  occasion  in  another 
chapter  to  refer  to  this  interesting  book,  which 
ran  to  many  editions.  It  shows  that  much  of 
the  slang  and  many  of  the  arts  and  tricks  of 
speculation  were  already  in  vogue  before  the 
formation  of  the  London  Stock  Exchange.1 

1  Before  proceeding  with  the  next  chapter,  readers  un- 
familiar with  the  subject  should  read  the  glossary  at  the  end 
of  the  book  (p.  253). 


CHAPTER  II 

THE  LONDON  STOCK  EXCHANGE,   1800-1910 

AT  the  desire  of  the  Royal  Commission  of 
1877  the  officials  of  the  London  Stock  Ex- 
change supplied  a  short  summary  of  the 
origin  and  objects  of  the  institution.  The 
secretary  stated  that  the  earliest  minutes  on 
the  subject  were  dated  December  1798,  and 
that  these  records  referred  to  the  existence 
of  a  Stock  Exchange  in  1773 — apparently 
the  Stock  Exchange  Coffee-house  in  Thread- 
needle  Street,  to  which  any  person  was  ad- 
mitted on  payment  of  sixpence.  Already 
these  rooms  were  known  as  "the  Stock  Ex- 
change," or  "the  House";  and  although 
transactions  in  the  public  funds  were  also 
carried  on  in  the  Rotunda  of  the  Bank  of 
England  "there  is  little  doubt  that  the 
Stock  Exchange  Rooms  afforded  a  ready 
market  for  the  operations  of  the  bankers, 
merchants,  and  capitalists  connected  with  the 
floating  of  the  numerous  loans  raised  at  that 
period  for  the  service  of  the  State."  It  is 
46 


LONDON  STOCK  EXCHANGE   47 

on  record,  continues  this  official  authority, 
that  the  rooms  were  under  the  control  of  a 
"committee  for  general  purposes,"  though 
the  expenses  of  management  were  defrayed 
by  the  voluntary  subscription  of  frequenters. 
The  functions  of  the  committee  were  from  the 
first,  as  they  have  since  remained,  "judicial 
as  regards  the  settlement  of  disputed  bar- 
gains, and  administrative  as  regards  rules  for 
the  general  conduct  of  business,  and  for  the 
liquidation  of  defaulters'  accounts." 

Early  in  1801  the  rooms  were  felt  to  be 
inadequate  for  the  increased  business  arising 
out  of  the  war  loans,  and,  moreover,  "it  be- 
came apparent  that  the  indiscriminate  admis- 
sion of  the  public  was  calculated  to  expose 
the  dealers  to  the  loss  of  valuable  property." 
This  led  to  the  establishment  of  a  strict 
and  privileged  monopoly,  resembling  in  some 
respects  that  of  the  law — brokers  correspond- 
ing to  solicitors  and  jobbers  to  barristers. 
A  group  of  Stock  Exchange  men,  having 
acquired  "a  centrical  situation,"  or  site,  in 
Capel  Court,  raised  a  capital  of  £20,000  in 
400  shares  of  £50  each  and  founded  a  new 
institution,  to  which  the  affairs  of  the  old 
rooms  were  ultimately  transferred.  The  first 
stone  of  the  new  building  was  laid  in  May 


48  THE  STOCK  EXCHANGE 

1801.  A  committee  for  general  purposes,  con- 
sisting of  thirty  proprietors,  was  formed,  who 
elected  members  of  the  new  Stock  Exchange 
by  ballot,  at  a  subscription  of  ten  guineas 
each.  The  deed  of  settlement  (March  27, 
1802)  recites  that,  whereas  the  Stock  Ex- 
change in  Threadneedle  Street,  where  the 
stock-jobbers  and  stock-brokers  met,  had 
been  found  inconvenient,  W.  Hammond  and 
others  had  secured  a  site,  and  had  "caused  to 
be  erected  a  spacious  building  for  the  trans- 
acting of  buying  and  selling  the  public  stocks 
or  funds  of  this  kingdom."  By  the  same 
deed  the  management,  regulations,  and  direc- 
tion of  the  new  Stock  Exchange  were  vested 
in  a  committee  consisting  of  thirty  members, 
or  subscribers,  to  be  chosen  annually  by  ballot 
on  March  25,  while  the  treasury  ship  and  man- 
agement of  the  building  were  placed  under 
the  sole  direction  of  nine  trustees  and  man- 
agers (separate  from  the  committee)  as  repre- 
sentatives of  the  proprietors.  By  this  deed  of 
settlement  the  London  Stock  Exchange  was 
governed  till  1876,  when  a  new  deed  (sub- 
stantially reproducing  the  original  deed) 
was  executed.  The  new  Stock  Exchange 
was  opened  in  March  1802,  with  a  list  of 
about  500  subscribers.  The  regulations  of  the 


LONDON  STOCK  EXCHANGE   49 

committee,  whose  main  purpose  was  to  ensure 
the  prompt  and  regular  adjustment  of  all 
transactions,  were  first  codified  and  printed 
in  1812.  They  have,  of  course,  been  amended 
and  enlarged  from  time  to  time  to  meet  the 
new  conditions  and  expansion  of  business. 

The  constitution  of  the  Stock  Exchange 
remains  substantially  unaltered,  being  still 
vested  in  two  bodies — the  managers  and  the 
committee,  the  former  representing  the  share- 
holders or  proprietors,  and  the  latter  the 
members  or  subscribers.  The  nine  managers 
(who  are  elected  in  threes  for  five  years  by 
the  shareholders)  fix  the  charges  for  admis- 
sion of  new  members  and  appoint  most  of  the 
officials,  excepting,  of  course,  the  secretary  to 
the  committee.  They  also  look  after  the 
building.1  The  committee,  on  the  other  hand, 
control  all  Stock  Exchange  business,  and 
administer  the  rules  and  regulations;  they 
adjudicate  all  questions  between,  and  com- 
plaints against,  members,  They  inquire,  and 
decide,  whether  their  rules  have  been  com- 
plied with  by  governments  and  companies 
which  ask  for  settlements  or  for  official  quota- 
tion of  their  stocks  in  the  Stock  Exchange 

1  There  are  20,000  shares  (£12  paid)  in  the  Stock  Exchange 
and  £416,700  debentures  outstanding. 


50  THE  STOCK  EXCHANGE 

List.  Their  number  is  thirty,  and  they  are 
elected  every  year  by  the  members.  At  the 
beginning  of  their  term  the  committee  elect 
a  Chairman  and  Vice-Chairman.  They  also 
elect  every  March,  before  they  go  out  of  office, 
all  the  old  Stock  Exchange  members  who  wish 
to  be  re-elected,  membership  being  granted 
for  one  year  only.  Any  member  can  object 
to  any  other  member  being  re-elected,  but 
this  is  a  very  unusual  incident.  The  great 
principle  upon  which  the  committee'  acts, 
and  to  which  most  of  its  regulations  are 
directed,  is  the  inviolability  of  contracts.  It 
has  power  to  suspend-  or  expel  any  member 
for  breaking  its  rules,  or  for  non-compliance 
with  its  decisions,  or  for  dishonourable  con- 
duct. A  member  of  the  London  Stock  Ex- 
change is  prohibited  from  advertising  or  from 
sending  circulars  to  any  but  his  own  clients. 
He  is  also  forbidden  to  belong  to  any  other 
Stock  Exchange,  or  "bucket  shop,"  or  other 
competing  institution.  New  members  are 
now  compelled  to  become  proprietors  by 
acquiring  at  least  one  Stock  Exchange  share, 
paying  a  heavy  entrance  fee  and  an  annual 
subscription  of  forty  guineas.  Yet  the  pre- 
cautions against  impecuniosity  are  inade- 
quate. Defaults  are  far  too  common.  The 


LONDON  STOCK  EXCHANGE   51 

membership  of  the  Stock  Exchange  had  risen 
to  about  800  in  1845.  In  1877  the  members 
exceeded  2,000,  and  there  were  over  500  share- 
holders or  proprietors.  In  1910  the  member- 
ship was  5,019.  The  average  dividend  on  the 
shares  of  the  Stock  Exchange  had  been  over 
20  per  cent,  during  the  first  seventy-five 
years  of  its  existence;  the  dividend  in  1909 
was  £10  a  share.  At  first,  as  appears  from 
the  deed  of  settlement,  the  new  Stock  Ex- 
change was  confined  to  transactions  in  the 
funds.  The  jobbers  in  foreign  stocks  were 
excluded,  and  resorted  mainly  to  the  walks 
of  the  Royal  Exchange.  A  certain  amount 
of  business  in  the  funds  continued  for  some 
time  in  the  Rotunda  of  the  Bank  of  England. 
Nor  did  the  Alley  men  cease  to  ply  their 
trade  hi  the  streets  and  coffee-houses.  But 
after  the  close  of  the  Napoleonic  wars  foreign 
loans  and  mining  and  canal  shares  were  in- 
troduced  into  the  new  Stock  Exchange;  and 
as  all  these  offered  higher  rates  of  interest  at 
a  time  when  the  yield  on  Government  loans 
was  falling,  the  Stock  Exchange  obtained  a 
large  accession  of  business  from  the  specula- 
tive  public.  This  led,  it  is  stated,  "to  a 
proper  apportionment  of  apartments  for  the 
dealing  in  English  and  foreign  stocks."  One 


52  THE  STOCK  EXCHANGE' 

room  was  appropriated  to  British  and  an- 
other to  foreign  government  stocks,  and  one 
corner  of  the  foreign  room  was  assigned  to 
dealings  in  "the  shares  and  scrip  certificates 
of  the  numberless  companies  which  from 
time  to  time  have  been  introduced."  The 
years  1824  and  1825  and  1826  saw  a  great 
outburst  of  speculation,  which  found  vent  in 
the  flotation  of  many  joint-stock  projects  as 
well  as  in  an  output  of  loans  to  the  new  re- 
publics of  South  America.  This  epoch  will 
repay  closer  study.  It  marks  the  beginning 
of  cosmopolitan  finance,  and  even  in  a  very 
rapid  survey  we  can  afford  to  pause  and  re- 
flect upon  occurrences  which  have  been 
repeated  or  substantially  reproduced  at  in- 
tervals in  all  parts  of  the  world. 

In  "a  complete  view  of  joint-stock  com- 
panies" formed  in  1824  and  1825,  the  author, 
Henry  English,  enumerated  626  joint-stock 
projects  which  would  have  required  for  their 
fulfilment  a  capital  of  372  millions  sterling! 
Their  objects  were  various  and  for  the  most 
part  useful.  Some  companies  were  to  be 
formed  for  insurance  and  investment;  others 
for  the  construction  of  canals  and  railways. 
Many  were  to  be  local  gas  companies,  and 
there  were  mining  flotations  of  all  sorts. 


LONDON  STOCK  EXCHANGE   53 

Between  1818  and  1832 — and  especially  in 
1824  and  1825 — there  were  also  issued  in 
London  quite  a  number  of  foreign  loans — in 
all  perhaps  some  40  millions  sterling  were  sub- 
scribed in  this  way.  According  to  a  parlia- 
mentary paper,  foreign  government  loans  to 
a  nominal  value  of  34  millions  were  con- 
tracted for  by  London  houses  at  23  millions, 
while  foreign  mining  companies  and  similar 
liabilities,  with  a  deposit  of  10  per  cent,  paid, 
amounted  to  24  millions.  A  table  before  me 
gives  twenty-six  foreign  government  loans  in 
all  for  the  period  1818  to  1832,  and  shows  that 
of  these  only  ten  continued  to  pay  interest  in 
1837.  Of  the  ten  survivors  several  defaulted 
a  little  later.  All  the  good  loans  (and  some 
of  the  bad  ones)  were  issued  either  by  N.  W. 
Rothschild  or  by  T.  Wilson  &  Co.  Among 
the  curiosities  of  the  list  one  notices  that 
Neapolitan  credit  was  much  better  than 
Prussian;  for  while  Rothschild  floated  a 
Prussian  5  per  cent,  loan  in  1818  at  72, 
the  Neapolitan  Fives  six  years  later  fetched 
92^.  In  1825  Ricardo  sold  Greek  Fives 
to  the  public  at  56|.  In  1821  Haldimand 
issued  a  Spanish  5  per  cent,  loan  at  56, 
and  two  years  later  J.  Campbell  &  Co. 
issued  another  at  30  J!  London  was  badly 


54  THE  STOCK  EXCHANGE 

hit  by  the  Spanish  American  Republics. 
In  1824  Baring  Brothers  contrived  to  issue 
£1,000,000  Buenos  Ayres  Sixes  at  85.  Colum- 
bia actually  raised,  at  6  per  cent.,  nearly  7  mil- 
lions sterling  of  nominal  debt,  and  at  prices 
ranging  from  84  to  88J.  Questioned  after- 
wards as  to  the  causes  of  the  boom  and  of  the 
crisis  which  succeeded,  a  Governor  of  the 
Bank  of  England  said  he  thought  the  specula- 
tive movement  was  started  by  the  conversion 
and  reduction  of  Government  5  per  cents,  in 
1823.  These  reductions  "prompted  almost 
everybody  to  entertain  any  proposition  for 
investment,  however  absurd."  The  excite- 
ment, he  thought,  "was  further  promoted 
by  the  acknowledgment  of  South  American 
Republics  by  this  country,  and  the  induce- 
ments held  to  those  governments,  in  which  all 
classes  of  the  community  in  England  seem  to 
have  engaged  simultaneously."  One  foreign 
mining  company  was  described  later  at  its 
winding-up  as  "one  of  the  projects  ventured 
in  a  period  when  it  was  thought  the  golden 
age  had  been  realised,  and  when,  without  a 
proper  consideration  for  the  consequences, 
the  public  too  eagerly  encouraged  the  schemes 
of  the  day."  Commercial  credit  and  the  ex- 
changes were  at  the  same  time  disturbed  by 


LONDON  STOCK  EXCHANGE   55 

speculation  in  iron  and  other  raw  materials; 
and  finally  a  crisis  was  precipitated  by  the 
failure  of  Messrs.  Pole  &  Co.,  an  important 
London  house  with  large  country  connec- 
tions. The  strain  must  have  been  enormous; 
for  according  to  James  Wilson,  the  first  editor 
and  proprietor  of  the  Economist,  the  total 
subscribed,  (i.  e.  promised)  for  foreign  loans, 
mines,  etcl  in  1824-5  was  48  millions,  and  for 
home  railways,  banks,  and  other  projects  126 
millions,  on  which  altogether  only  35  millions 
were  paid  up !  No  wonder  that  a  crash  came. 
After  a  decade  of  depression  and  quiescence, 
when  stock  and  share  speculation  took  a  new 
start  in  connection  with  railways,  the  "little 
go"  for  the  sale  of  letters  of  allotment  was 
held  in  the  Royal  Exchange  before  the  mer- 
chants assembled,  until  at  last  the  swarms  of 
the  "little  go"  or  "Alley  men"  became  such 
a  nuisance  that  the  beadles  had  to  drive  them 
out.  In  the  height  of  this  speculation,  it  is 
recorded — such  was  the  distrust  of  steam 
locomotion — some  of  the  "dabblers"  made  a 
price  of  one  farthing  per  share  for  50  shares 
of  what  afterwards  turned  out  to  be  one  of  the 
most  important  of  English  railways.  In  the 
boom  years  of  1834-6,  joint-stock  companies 
with  a  total  capital  of  135  millions  were 


56  THE  STOCK  EXCHANGE 

formed,  divided  into  more  than  2j  million 
shares.  New  railway  companies  accounted 
for  over  69  millions  of  capital  with  590  thou- 
sand shares,  banks  for  23  millions  capital 
and  670  thousand  shares.  Allowing  an  aver- 
age of  £3  for  deposit  on  each  share,  the  total 
sums  raised  were  only  just  over  1\  millions. 
The  market  recovered  slowly  from  this  out- 
put of  liabilities.  But  in  the  course  of  time 
the  importance  and  profit-making  capacity 
of  the  new  iron  roads  began  more  and  more  to 
fill  the  public  mind.  The  first  railway  boom 
was  fairly  launched  in  1834-5.  Within  twelve 
months  over  600  distinct  projects  for  railway 
lines  in  the  United  Kingdom  were  placed  be- 
fore the  public,  demanding  upwards  of  six 
hundred  millions  of  money.  But  as  five  or 
six  competing  companies  often  asked  parlia- 
mentary powers  for  practically  the  same  line, 
the  real  capital  required  was  very  much 
smaller.  The  actual  capital  of  the  British 
lines,  which  were  incorporated  by  statute  in 
1844-5  and  were  in  course  of  construction, 
was  only  55  millions.  Foreign  railroad 
schemes  also  poured  in  from  all  quarters  eager 
for  British  capital,  and  these  again  would 
have  absorbed  from  seventy  to  a  hundred 
millions  sterling.  As  might  have  been  sup- 


LONDON  STOCK  EXCHANGE   57 

posed  these  projects,  actual  and  anticipatory, 
led  to  a  great  demand  for,  and  a  still  greater 
speculation  in,  iron,  which  more  than  doubled 
in  price  and  so  magnified  the  difficulties  oc- 
casioned by  the  inadequacy  of  available 
capital  and  credit.  Ten  years  later,  in  a 
warning  article  as  to  the  probability  of  an- 
other crisis  on  the  analogy  of  the  previous 
one,  which  appeared  in  the  Economist  in 
October  1845,  the  promotions  and  flotations 
of  the  three  periods  of  speculation  were 
thus  compared  and  summarised  in  millions 
sterling: — 

Home  Schemes.  Foreign.  Total.    Paid  up  and  Deposits. 

1824-5     156  43  204  35 

1834-7     129  21  150  22 

1844-5     612  79  691  78 

At  the  time  when  this  account  was  made 
up  the  premiums  on  railways,  which  had  not 
yet  secured  an  Act  of  Parliament,  could  not 
be  estimated  at  less  than  40  millions,  which 
represented  "increased  wealth  hanging  on 
opinion."  Mr.  Wilson's  warning  forecasts 
proved  correct,  and  the  Stock  Exchange 
panics  and  liquidations,  which  took  place  in 
the  late  autumn  and  winter  of  1845-6,  cul- 
minated in  the  money  panic  and  banking 
crisis  of  October  1847. 

An  anonymous  but  well-informed  writer 


58  THE  STOCK  EXCHANGE 

affords  us  a  glimpse  of  the  Stock  Exchange  in 
1845,  at  the  height  of  the  railway  boom: — 

"The  share  market,  which,  till  within  the 
last  two  years,  was  occupied  with  four  or' 
five  distinct  brokers  and  a  number  of  jobbers, 
whose  means  of  business  were  very  small, 
has  now  become  the  grand  focus  of  specula- 
tion and  legitimate  business.  English  and 
foreign  government  securities  are  quite  de- 
serted for  the  superior  attractions  of  English 
and  foreign  Railway  scrip,  which,  of  all  shades 
and  character,  has  been  freely  distributed 
throughout  the  United  Kingdom. 

"The  broker  and  jobbers  who  had  the  first 
'pick'  of  the  market,  must  have  made  con- 
siderable sums  by  their  commissions;  since 
the  other  brokers  and  jobbers,  who  paid  more 
attention  to  the  other  public  securities,  were 
almost  discarded  by  their  former  customers, 
who,  in  many  cases,  were  led  to  believe  that 
the  *  English  and  Foreign  Stock'  broker  and 
jobber  could  not  transact  share  business. 
Indeed,  it  appears  to  have  been  some  time 
before  the  veil  of  mystery  was  removed, 
or  that  the  public  arrived  at  a  clear  under- 
standing of  the  subject.  In  the  meanwhile 
the  old  and  respectable  members  of  the  House 
had  the  mortification  to  see  persons,  who 


LONDON  STOCK  EXCHANGE   59 

formerly  had  been  of  little  reputation  on  the 
Exchange,  and  in  many  instances  even  their 
own  clerks,  carrying  on  an  extensive  and 
profitable  business  in  shares;  and  as  long  as 
this  lasted  there  was  no  end  to  the  success 
of  those  who  had  the  sway  of  the  market. 
Gradually  dealings  were  dispersed  and  spread 
among  the  whole  of  the  fraternity,  and  then 
followed  the  height  of  speculation,  engen- 
dered by  the  general  operations  of  the  chief 
part  of  the  community.  The  shares  of  every 
new  company  coming  out  at  a  premium, 
induced  rich  and  poor  to  thrust  themselves 
into  the  market;  and  the  schemes  that  are 
every  day  resorted  to  in  order  to  gain  posses- 
sion of  letters  of  allotment  which  may  bring 
a  price,  if  the  shares  be. paid  on,  are  of  the 
most  multifarious,  and,  in  many  instances, 
fraudulent  description. 

"Such  has  been  the  increase  of  business 
in  consequence  of  the  speculation  in  shares 
that  the  accounts  which  used  formerly  to 
occupy  not  more  than  one  or  two  days  at 
the  outside,  nearly  exhaust  the  week,  before 
differences  can  be  paid,  transfers  made,  and 
the  books  of  the  brokers  regularly  adjusted. 
The  extent  of  the  transactions  has  increased 
beyond  measure;  night  and  day  clerks  are 


60  THE  STOCK  EXCHANGE 

engaged  in  arranging  sales  and  purchases,  and 
conducting  the  correspondence  which  is  re- 
quired between  their  masters  and  principals. 
"Innumerable  instances  are  stated  of 
persons,  who  a  few  months  ago  were  not 
worth  anything,  having  made  their  thousands 
of  pounds,  and  several  of  these  are  junior 
members  of  the  House,  who  were  fortunate 
enough  to  deal  in  those  shares  which  have 
attained  high  premiums.  Considering  the 
time  and  attention  required  in  share  business, 
the  brokers  do  not  get  too  well  paid;  although 
there  may  be  every  reason  to  suppose  that 
many  are  obtaining  immense  incomes  from 
it  by  the  inordinate  influx  of  commissions. 
This  will,  we  think,  be  seen  when  we  state 
that  the  principal  [part]  of  the  business  be- 
ing transacted  in  the  new  scrip,  upon  which 
not  more  than  £l  to  £3  has  been  paid,  they 
only  realise  the  small  commission  of  Is.  3d. 
per  share.  If  they  buy  or  sell  largely  of 
Brighton,  Birmingham  and  Grand  Junction, 
they  get  the  larger  commission;  but  these 
descriptions  have  not  been  dealt  in  to  any 
comparable  extent  with  the  issues  of  the  new 
companies.  Brighton  and  South  Eastern 
have  undergone  considerable  fluctuation  dur- 
ing the  mania;  but  then,  as  the  business  was 


LONDON  STOCK  EXCHANGE    61 

in  a  few  hands,  it  cannot  be  supposed  to  have 
extended  its  beneficial  influence  over  the 
whole  market." 

S6me  fortunate  brokers  were  said  to  have 
made  £3,000  and  £4,000  a  day  by  their  busi- 
ness, but  not,  of  course,  by  commissions. 
By  lucky  speculations  they  might  easily  have 
made  much  larger  amounts.  One  fortunate 
individual  outside  the  House,  who  held 
largely  of  Churnett  Valley  scrip  before 
the  announcement  of  the  sanction  of  the 
Board  of  Trade  to  the  project,  "sold  at  the 
best  price  of  the  market  when  the  announce- 
ment was  made,  and  netted  by  his  one  coup 
£27,000."  Very  large  sums  were  made 
and  lost  in  London  and  York,  and  Direct 
Northern — two  of  the  leading  "fancies" 
which  were  dealt  in  more  for  speculation 
than  investment. 

The  number  of  American  and  foreign  lines 
introduced  on  the  London  Stock  Exchange 
added  to  the  excitement  prevailing.  But, 
compared  with  the  madness  of  1825  and  1826, 
there  was  this  much  to  be  said  for  the  rail- 
way mania  of  1844-5 — viz.  that  the  new  lines 
were  undertakings  of  vast  utility  and  national 
importance,  and  though  viewed  at  first  with 
much  jealousy  and  distrust,  were  already 
producing  results  which  the  most  sanguine 


6*  THE  STOCK  EXCHANGE 

liad  never  counted  on.  Consequently,  writes 
one  sober  critic,  speculation  in  railway  shares 
was  encouraged  not  only  as  an  investment 
likely  to  yield  high  rates  of  interest,  but 
also  for  the  benefit  it  confers  on  mankind 
at  large.  "The  feasibility  of  the  numerous 
schemes,  and  the  elements  of  success  they 
present,  have,  under  these  circumstances, 
raised  an  unanimous  feeling  in  their  favour, 
which,  sanctioned  as  they  have  been  by 
Government  superintendence  and  Govern- 
ment interference,  could  not  but  contribute 
to  feed  the  growing  desire  of  the  public  to 
embark  in  them.  The  warnings  that  have 
been  given  have,  therefore,  not  been  re- 
garded, and  the  mania  has  gone  on  to  an 
extent  almost  unprecedented  even  by  the 
great  South  Sea  bubble  itself." 

The  following  criticism  made  by  the  same 
writer  in  1845  was  fully  justified  by  events:— 

"The  feasibility  of  the  greater  number 
of  the  schemes  brought  before  the  public 
has  encouraged  the  example  of  starting  com- 
peting lines;  while,  in  addition,  foreign  pro- 
jects of  the  most  questionable  description 
have  come  out,  the  shares  of  which  have 
maintained  high  premiums  for  a  few  days, 
and  have  then  sunk  into  utter  worthlessness. 


LONDON  STOCK  EXCHANGE   03 

Among  all  this  incongruous  mass  there  must 
be  part  that  will  ripen  to  decay;  and  hence, 
while  the  stability  of  the  system  itself  is 
acknowledged,  it  is  that  stability  which  has 
fostered  many  of  the  sham  companies  of  the 
present  day.  When  the  crash  does  come  it 
will  be  terrible.  The  best  of  the  securities 
will  feel  it  for  a  time,  though  restoration  to  a 
proper  value  will,  no  doubt,  follow  when  the 
market  shall  have  settled  down  and  the  web 
of  ephemeral  speculation  be  cleared  away." 

It  is  interesting  to  learn  from  the  same 
source  that  the  swindling  and  blundering 
which  marked  the  flotation  and  management 
of  British  railways  in  those  early  days  were 
gradually  corrected  by  the  criticisms  of  a 
few  honest  and  competent  journals. 

Morier  Evans,  the  historian  of  the  crisis 
of  1847-8,  compared  the  prices  of  certain  rail- 
way securities  in  the  height  of  the  boom 
(August  1845)  and  the  depth  of  the  depres- 
sion (October  1848).  Thus  in  August  1845, 
Great  Western  rose  to  236,  and  fell  in  October 
1848  to  65J-,  London  and  North-Western 
rose  to  254  and  fell  to  99;  Midland  rose  to 
183  and  fell  to  64.  Northern  of  France  rose 
to  7f  and  fell  to  5f .  Scandals  of  all  kinds 
surrounded  the  promotion  of  our  railways. 


64  THE  STOCK  EXCHANGE 

Extortionate  sums  were  paid  for  worthless 
land.  The  financiers,  the  lawyers  and  all 
concerned  had  such  pickings  and  perquisites 
that  we  can  hardly  understand  (even  after 
allowing  for  the  good  work  of  the  critics)  how 
the  main  English  lines  emerged  with  their 
finances  on  a  basis  so  much  sounder  than 
similar  undertakings  in  many  other  countries* 

Capital  was  collected  from  all  parts  of  the 
country,    and    the    transactions    in    railway 
shares  were  so  voluminous  and  universal  that 
the  ordinary  channels  were  quite  inadequate. 
Clerks  at  small  salaries  in  banks  and  mer-' 
chants'    counting-houses   openly   proclaimed 
themselves  buyers  and  sellers  of  the  various ' 
favourite  shares,  just  as  if  they  represented.1 
their  employers.     Not  only  in  London,  but1 
in  Manchester,  Leeds,  Liverpool,  Glasgow,' 
Dublin,  Hull,  Edinburgh  and  Bristol,  rail- 
way share  markets  were  established,  and  the 
business  of  the  City  was  for  a  time  equalled 
if  not  surpassed  by  the  provinces.     As  an 
anxious  contemporary  put  it  on  the  eve  of 
the  crisis: — "The  farmer  is  now  as  deep  in 
railway  shares  as  the  merchant,  the  merchant 
as  the  banker;  and  the  whole  circle  of  society 
is  entangled  in  the  mania." 

The  long  list  of  failures  that  occurred  in 


LONDON  STOCK  EXCHANGE   65 

1847  and  1848  attests  the  correctness  of  this 
analysis.  But  with  every  succeeding  decade 
the  stability  of  our  banks  and  merchant 
houses  and  of  all  our  financial  institutions 
has  steadily  grown  with  the  increasing  wealth 
and  intelligence  of  the  nation.  In  the  pages 
of  Bagehot  and  other  writers  we  may  read  of 
a  strain  on  credit  which  caused  extraordinary 
measures  to  be  taken  by  the  Bank  of  England 
in  1857  as  a  result  of  the  American  panic,  and 
again  (for  the  last  time)  hi  1866,  after  the 
failure  of  Overend  Gurney.  The  Baring 
Crisis  of  1890  was  brought  about  by  over- 
confidence  in  the  pace  at  which  Argentina's 
potential  wealth  would  be  developed  and  ex- 
ploited by  British  capital.  In  the  two  pre- 
vious years  over  60  millions  of  British  capital 
had  been  lent  to  Argentina,  but  in  midsummer 
1890  a  loan  of  5  millions  for  the  Argentine 
Government  missed  fire.  A  revolution  and  a 
run  on  the  banks  followed.  Mr.  Burn  says: 
"The  fall  in  South  American  securities  was 
very  heavy,  and  the  situation  from  August  to 
October  was  very  delicate.  There  was  a  de- 
cided undercurrent  of  opinion  that  several 
houses,  notably  Baring's,  had  dangerously 
increased  their  acceptances."  At  the  weekly 
meeting,  on  Thursday,  Nov.  6,  of  the  Di- 


66  THE  STOCK  EXCHANGE 

rectors  of  the  Bank  of  England  the  Bank 
rate  was  unaltered,  though  the  reserves  stood 
at  only  11  millions;  but  on  the  following  day 
it  was  unexpectedly  raised  to  6  per  cent.,  and 
the  Stock  Exchange  began  to  be  alarmed. 
However,  the  settlement  on  the  following 
Tuesday  passed  off  without  trouble.  But  on 
the  Wednesday  three  banks  were  reported  to 
be  in  difficulties.  On  Thursday  it  was  learned 
that  the  Bank  of  France  had  lent  3  millions 
of  gold  to  the  Bank  of  England;  on  Friday  a 
meeting  was  held  at  the  Bank  to  consider 
the  affairs  of  Messrs.  Barings,  and  on  Satur- 
day (Nov.  15)  it  was  definitely  announced 
that  a  scheme  had  been  carried  through  to 
enable  them  to  meet  their  liabilities.  The 
firm's  liabilities,  which  amounted  to  21  mil- 
lions sterling,  were  liquidated  in  the  course 
of  four  years;  and  the  effects  of  this  sup- 
pressed crisis  remained  for  a  long  time. 

A  speculative  recovery  was  powerfully 
stimulated  by  the  wonderful  discoveries  and 
skilful  exploitation  of  the  Rand  mines  in  the 
Transvaal  by  cosmopolitan  groups  of  finan- 
ciers, among  whom  Cecil  Rhodes  was  the 
most  popular  figure.  This  Napoleon  of  Cape 
Town  and  Kimberley  became  the  hero  of  our 
Stock  Exchange.  Skilfully  blending  finance 
and  politics,  he  for  a  long  time  worked  in 


LONDON  STOCK  EXCHANGE   67 

alliance  with  the  Dutch  party  at  the  Cape, 
keeping  on  good  terms  with  the  Boers,  and 
simultaneously  by  a  handsome  contribution 
to  Parnell's  funds  he  contrived  to  secure 
Irish  Nationalist  assistance  for  the  Chartered 
Company.  Nevertheless  his  reputation  in 
London  was  that  of  an  empire-builder.  The 
Press  fell  under  his  sway,  and  the  London 
Stock  Exchange  responded  enthusiastically 
to  all  the  financial  schemes,  good,  bad  and 
indifferent,  of  the  new  South  African  leader 
and  his  fellow  magnates.  But  the  enormous 
fortunes  made  in  the  nineties  under  the 
Kruger  regime  did  not  satisfy.  Those  who 
had  received  much  wanted  more.  Those 
who  had  shorn  one  flock  of  investing  lambs 
wanted  to  shear  another.  Those  who  had 
become  millionaires  on  a  sudden  objected  to 
pay  any  toll  whatever  to  the  Government, 
and  conceived  the  idea  of  turning  out  the 
Boers  and  of  so  producing  another  Kaffir 
boom  which  would  raise  their  wealth  beyond 
the  utmost  dreams  of  human  avarice.  In 
pursuance  of  this  plan  fictions  of  all  sorts 
were  circulated.  Old  President  Kruger,  ob- 
stinate and  unenlightened,  but  a  quite  human 
mixture  of  shrewdness  and  stupidity,  virtue 
and  vice,  was  represented  as  a  monster  of 
tyranny  and  corruption.  The  strength  and 


88  THE  STOCK  EXCHANGE 

courage  of  the  Boer  farmers  were  made  light 
of,  and  Rhodes  even  assured  the  British 
Government  (then  embarked  on  a  policy  of 
interference)  that  the  Boers  could  not  shoot. 
It  may  be  doubtful  how  far  the  Cabinet 
really  meant  to  go,  and  how  far  it  drifted 
into  an  avoidable  catastrophe  through  mere 
mishandling  of  the  negotiations.  But, 
whether  deliberate  or  accidental,  certain  it 
is  that  the  war  proved  more  disastrous  to 
the  London  Stock  Exchange  and  the  in- 
terests of  the  City  than  any  event  which 
had  taken  place  since  the  failure  of  Overend 
Gurney.  A  military  promenade,  which  was 
to  have  been  over  in  a  month  or  two,  re- 
sulted in  three  years  of  stubborn  and  anxious 
warfare.  The  total  cost,  which  was  esti- 
mated by  Sir  Michael  Hicks-Beach,  the 
Chancellor  of  the  Exchequer,  in  October 
1899,  at  10  millions,  to  be  defrayed  by  a  levy 
on  the  gold  mines,  eventually  came  to  about 
250  millions,  every  penny  of  which  was  con- 
tributed by  British  loans  and  British  taxes. 
For  a  moment,  at  the  outbreak  of  the  war, 
Transvaal  mining  shares  rose,  but  as  soon  as 
the  idea  of  a  promenade  vanished,  and  a  long 
prospect  of  difficult  and  costly  operations 
opened  out  they  began  to  droop,  and  fell  to 
lower  and  lower  depths  as  the  war  dragged 


LONDON  STOCK  EXCHANGE   69 

on.  Consols  followed  the  same  movement  as 
Kaffirs.  They  had  receded  partly  as  a  result 
of  increasing  expenditure  and  diminishing 
Sinking  Fund,  partly  through  fear  of  war, 
from  a  top  price  of  113  in  1898  to  about 
104  at  the  outbreak  of  hostilities.  But  the 
"Khaki"  2f  per  cent,  loan  in  the  spring  of 
1900  was  raised  with  enthusiasm,  showing 
that  the  public  believed  in  a  speedy  ending 
of  the  war  and  a  substantial  indemnity  from 
the  mines.  When  the  Milner  policy  of  un- 
conditional surrender  was  at  last  abandoned, 
and  the  peace  of  Vereeniging  signed,  Consols 
and  Kaffirs  rallied.  But  it  was  only  a  short 
and  feverish  flicker  of  speculative  purchases, 
which  collapsed  under  heavy  liquidation. 
The  mining  industry  had  been  temporarily 
ruined,  the  cost  of  living  had  risen,  the  native 
labour  had  dispersed,  a  strange  mixture  of 
luxury,  waste,  misery,  disease,  plunder  and 
demoralisation  had  dislocated  the  social 
organism  and  the  mechanism  of  business. 
Many  of  the  promoters  and  speculators  who 
had  been  most  eaget  for  the  war  were  ruined. 
All  the  mining  houses  connected  with  the 
Rand  suffered  severely,  nor  did  they  recoup 
their  losses  by  the  costly  experiment  of 
importing  Chinese  coolies. 
^  A  declension  of  Consols  by  20  per  cent,  was 


70  THE  STOCK  EXCHANGE 

proportionate  to  the  increase  of  supply;  for 
the  National  Debt  was  enlarged  by  160  mil- 
lions sterling  in  order  to  meet  the  extraordi- 
nary expenditure  on  the  war.  For  four  or  five 
years  the  Sinking  Fund  was  practically  or 
actually  suspended,  and  when,  under  the  firm 
financial  guidance  of  Mr.  Asquith,  the  reduc- 
tion of  Debt  was  vigorously  renewed  at  an 
unparalleled  rate,  the  decline  of  national 
credit  was  checked  rather  than  arrested;  for 
the  enormous  cost  of  the  Russo-Japanese  War 
had  drained  many  millions  of  British  and 
French  capital  into  the  new  5  and  6  per  cent, 
bonds  of  these  two  combatants.  In  fact  the 
public  debts  of  the  world,  along  with  wars, 
armaments  and  taxation,  have  expanded  in 
the  first  ten  years  of  the  twentieth  century 
more  rapidly  than  the  effective  demand  for 
them.  Possibly — and  if  some  limitation  of 
armaments  can  be  arranged,  probably — the 
decline  of  gilt-edged  securities  may  now  cease 
and  a  substantial  recovery  commence.  For 
British  Consols  to  yield  more  than  3  per  cent, 
in  time  of  peace  and  prosperous  trade  is  cer- 
tainly abnormal.  But  then  the  scope  of 
trustee  securities  was  extended  by  some  300 
millions  in  1900  for  the  benefit  of  our  colonies, 
and  the  growth  of  armaments  in  a  dozen  years 
by  30  millions  sterling  represents  each  year 


LONDON  STOCK  EXCHANGE   71 

an  economic  waste  equivalent  to  what  our 
grandfathers  would  have  considered  a  very 
formidable  and  costly  war. 

The  effect  of  the  Kaffir  boom  in  England 
was  to  create  a  new  and  very  popular  field 
for  speculative  investment.  The  House 
rapidly  expanded,  and  the  mining  section 
suddenly  bulged  out  into  the  Kaffir  Circus, 
•which  after  hours  filled  Throgmorton  Street 
with  wild  and  noisy  confusion.  The  slump 
was  disastrous  and  protracted.  The  losses  in 
Chartered  shares  and  in  many  of  the  inferior 
mines  of  the  Transvaal  and  of  Rhodesia  have 
never  been  recovered,  but  in  the  last  three  or 
four  years  the  intrinsic  merits  of  the  Rand 
mines,  the  reconciliation  and  union  of  South 
Africa,  and  a  great  improvement  in  the 
labour  supply  have  contributed  to  restore 
values  to  the  Kaffir  market  and  animation 
to  the  Kaffir  Circus.  But  Consols,  gilt-edged 
securities  of  all  kinds,  home,  colonial  and 
foreign,  British  railways,  bank  and  insurance 
shares,  breweries,  and  many  other  industrial 
securities  have  all  exhibited,  as  the  direct  or 
indirect  consequence  of  the  Boer  War,  falls  of 
from  10  to  50  per  cent.  The  loss  of  capital 
and  credit  caused  by  such  a  shrinkage  cannot 
be  computed;  but  every  banker  and  cambist 
in  London  knows  how  much  London's  prestige 


73  THE  STOCK  EXCHANGE 

and  influence  as  the  headquarters  of  inter-^ 
national  money  and  exchange  were  shaken. 
If  those  who  made  the  war  had  been  allowed 
to  make  a  tariff,  the  greatest  emporium, 
the  greatest  shipping,  broking  and  banking 
centre  of  the  world  would  have  been  not  only 
shaken  but  shattered.  Grass  would  have 
grown  in  the  port  of  London  and  in  the  streets 
of  the  City.  Gradually  the  London  ware- 
houses would  have  emptied,  the  shipping  of 
its  port  would  have  shrunk,  the  value  of  a 
bill  on  London  would  have  disappeared,  the 
London  money  market  and  the  London  stock 
markets  would  by  degrees  have  yielded  their 
proud  supremacy  —  a  supremacy  founded 
upon  a  wise  policy  of  political,  economic, 
commercial  and  financial  freedom.  Instead 
of  these  disasters,  thanks  almost  entirely  to 
its  freedom  from  tariffs  and  consequent  mono- 
poly of  wholesale  markets,  London  has  now 
again  strengthened  its  position  as  the  importer 
and  re-exporter  of  metals  and  raw  materials 
of  all  kinds.  And,  thanks  partly  to  this, 
partly  to  its  vast  supply  of  free  and  loanable 
capital,  it  has  recently  acquired  complete 
command  of  the  expanding  market  in  rubber. 
With  this  control  of  the  raw  product,  which 
is  now  governed  by  the  sales  in  Mincing  Lane, 
the  acquisition  and  financial  management 


LONDON  STOCK  EXCHANGE   73 

j 
of   the  new  plantations  for   the  growth  of 

"  tame  "  rubber  has  naturally  come  to  Great 
Britain.  The  rubber  boom  in  the  spring  of 
1910  may  fairly  be  represented  as  the  harvest 
which  English  and  Scottish  financiers  and 
brokers  have  reaped  as  a  result  of  free  markets 
and  unimpeded  trade. 

Another  episode  in  the  history  of  the  Lon- 
don Stock  Exchange — the  American  crisis  and 
panic  of  1907 — may  conveniently  be  deferred 
to  later  chapters. 

It  remains  to  say  a  few  words  as  to  the 
rules  of  the  London  Stock  Exchange,  and  its 
methods  of  doing  business.  The  feature  which 
distinguishes  it  from  provincial,  colonial  and 
foreign  Exchanges  is  the  division  of  functions 
between  brokers  and  jobbers,  a  division  which 
seems  to  go  back  to  its  foundation.  The  job-  j 
ber  works  on  the  floor  of  the  House,  and  deals 
only  with  the  broker.  The  broker  takes 
orders  from  the  outside  public  and  buys  from 
or  sells  to  the  jobber.  Thus  the  broker  feeds 
the  jobber  much  as  the  solicitor  feeds  the 
barrister.  The  broker  takes  his  commission 
and  the  jobber  his  turn.  The  working  of  the 
system  is  very  simple,  and  may  be  illustrated 
by  a  simple  example.  Jones,  an  investor, 
sees  that  Consols  stand  at  about  79.  He 
determines  to  buy  £1,000  nominal,  i.  e.  to 


74  THE   STOCK   EXCHANGE 

spend  £790.  So  he  tells  his  broker  Smith  to 
buy  him  that  amount  at  the  best  price  obtain- 
able. Smith  goes  from  his  broker's  office 
into  the  House  and  makes  his  way  to  the 
group  of  jobbers  who  deal  in  the  Consol  mar- 
ket. He  finds  Robinson  and  asks  him  the 
price  of  Consols.  Robinson  replies  7Sf-79, 
meaning  that  he  will  buy  at  78|  and  sell  at 
79.  Smith  buys  from  him  at  79,  and  the 
bargain  is  complete.  Smith  sends  a  contract 
note  to  Jones  which  runs  as  follows:  — 

£1000  Consols  at  79   ....    £790 

Contract  Stamp 2s. 

Commission  J £l    5    0 

Jones  sends  a  cheque  for  £791  7s.,  which  1 
expressly  includes  the  broker's  commission, 
and    also    in    reality    includes   the   jobber's 
remuneration.     This  system,  with  its  division 
of  functions,  is  very  good  for  active  securities 
in   which  there  are  numerous  transactions. 
In  such  cases  the  separate  existence  of  jobbers 
makes  for  a  free   market  and  close  prices. 
There  is  no  place  in  the  world  where  good  j 
stocks  are  more  easily  and  quickly  realisable  ; 
at  a  minimum  of  loss,  or  purchasable  so  near 
the  market  price,  as  on  the  London  Stock 
Exchange.     For  this  and  other  reasons  it  re- 
ceives a  vast  amount  of  American  and  foreign 


LONDON  STOCK  EXCHANGE   75 

orders,  and  its  official  list  is  the  largest  and 
the  most  international  in  the  world.  But 
the  investor  should  note  that  a  quotation 
in  the  official  list  does  not  mean,  in  the  case 
of  securities  seldom  dealt  in,  that  your  broker 
can  at  any  time  get  a  jobber  to  deal  in  the 
stock  at  the  nominal  or  quoted  price.  And 
when  there  is  a  slump  in  a  market  and  a  rush 
of  selling  orders  with  no  support,  as  happened 
in  rubber  shares  in  the  months  of  June  and 
July  1910,  the  jobbers  are  apt  to  be  away  at 
lunch  all  day,  and  the  brokers  have  to  report 
to  their  clients  that  they  simply  cannot  find  a 
purchaser. 

It  should  be  added  that  London  Stock  Ex- 
change brokers  are  not  allowed  to  advertise. 
They-  may  only  send  circulars  to  their  own 
clients.     The  first  business,  therefore,  of  an 
English  investor  is  to  find  a  good  broker. 
He  will  then  be  protected  in  all  his  transac- 
tions by  the  rules   and  regulations  of  the 
London  Stock  Exchange.     Or  if  he  lives  in  | 
a  large  provincial  town  with  a  Stock  Exchange  j 
of  its  own,  he  may  prefer  to  do  business  with 
one  of  its  members — a  local  broker.    In  that 
case  he  will  probably  be  just  as  well  served.  I 
What  he  must  avoid  like  the  plague  is  the 
outsider  who  offers  to  sell  him  rubbish  shares 
charging  no  commission. 


CHAPTER  III 

LONDON'S  FOREIGN  MARKET  AND  THE 
FOREIGN  BOURSES 

A  SPECIAL  chapter  will  be  dedicated  to 
"Wall  Street  and  the  American  market;  for 
they  stand  in  magnificent  isolation  from  the 
rest  of  the  world,  always  excepting  Canada 
and  Mexico.  No  doubt,  as  the  population 
grows  and  the  pioneering  or  buccaneering 
instinct  finds  itself  cramped  by  the  want  of 
new  territories  at  home  to  explore  or  exploit, 
the  interest  of  American  finance  in  foreign 
affairs  tends  to  expand.  At  present  this  ex- 
pansion is  felt  mainly  in  two  directions — east- 
wards towards  China  and  Japan,  southwards 
through  Mexico  to  Panama  and  the  Spanish 
republics.  But  such  is  the  banking  and 
economic  supremacy  of  England  that  a  citizen 
of  the  United  States  finds  it  most  convenient 
to  visit  Argentina  or  Brazil  via  London,  and 
many  of  the  products  of  South  America  are 
shipped  to  London  before  they  reach  their 
76 


LONDON'S  FOREIGN  MARKET      77 

ultimate  destination  in  New  York  or  Boston 
or  Philadelphia.  It  is  the  same  with  Ex- 
change transactions.  The  bill  on  London  still 
reigns  supreme.  Besides,  the  United  States  is 
still  a  borrower  rather  than  a  lender,  which,  in 
itself,  explains  why  there  is  practically  no 
foreign  market  on  the  New  York  Stock 
Exchange.  British  consols,  German  and 
Russian  bonds,  French  rentes  are  unquoted 
because  they  are  not  wanted.  Even  the 
New  York  railway  market  is  purely  American 
with  the  exception  of  lines  like  the  Canadian 
Pacific  or  the  Mexican  Group,  which  connect 
with  the  American  system.  Thus  London's 
financial  relations  with  the  world  in  general 
are  distinguished  from  its  relations  with 
America,  and  this  distinction  is  accurately 
reflected  by  the  London  Stock  Exchange. 
The  groups  of  jobbers  who  deal  in  foreign 
bonds  and  foreign  railways  stand  quite  apart 
from  the  American  crowd. 

The  causes  that  have  attracted  foreign 
merchants  and  speculators  to  London  from 
the  time  of  the  Romans,  well  deserve  detailed 
examination.  The  economic  historian  might 
show  how  admirably  the  estuary  of  the 
Thames  was  adapted  for  commerce  with  all 
the  northern  ports  of  Europe,  and  how,  after 


78  THE  STOCK  EXCHANGE 

the  discovery  of  America,  the  capital  of  Eng- 
land was  almost  bound  to  be  the  centre  of 
the  commercial  world.  Our  insular  security 
and  our  rich  resources  of  coal  and  iron  enabled 
us  to  take  full  advantage  of  the  inventions 
which  revolutionised  manufactures,  trans- 
port, and  exchange  between  1750  and  1850. 
British  shipping  and  British  manufactures, 
though  small  in  comparison  with  modern 
ideas,  were  large  in  comparison  with  their 
rivals.  In  capital,  credit,  currency,  and  the 
art  of  banking,  London  got  the  start  and 
kept  it.  Necessitous  foreign  Governments 
and  corporations  began  to  look  to  London 
houses,  like  those  of  Rothschild  and  Baring, 
to  supply  their  small,  but  growing,  demands 
for  capital.  Sixty  years  ago,  indeed,  Paris 
was  still  a  formidable  rival  in  finance,  and  the 
United  States  in  shipping.  But  just  at  this 
critical  moment  England  adopted  the  policy 
of  a  free  market  for  gold  and  all  commodities. 
A  sound  currency  and  an  almost  perfect  bank- 
ing system  were  firmly  established  at  the 
same  time  that  perfect  freedom  of  import- 
ing and  exporting  was  given  to  the  whole 
nation.  In  the  course  of  '  a  few  years  all 
protective  duties,  and  all  duties  upon  exports 
such  as  coal  and  machinery  were  entirely 


LONDON'S  FOREIGN  MARKET      79 

removed.  Our  trade  advanced  by  leaps  and 
bounds.  British  shipping  expanded  at  such 
a  rate  that  before  the  end  of  the  century  it 
actually  represented,  and  still  represents, 
roughly,  half  the  world's  mercantile  marine. 
The  United  States,  after  the  Civil  War, 
adopted  an  exactly  opposite  policy  of  re- 
striction. Prices  were  artificially  raised.  The 
high  tariff  wall,  which  was  erected  to  ex- 
clude foreign  competition,  raised  the  cost  of 
production.  American  manufacturers  were 
unable  to  compete  in  neutral  markets,  and 
the  American  mercantile  marine,  which  had 
threatened  to  rival  and  outdistance  ours, 
dwindled  into  insignificance.  Meanwhile,  on 
the  Continent,  Germany  forged  ahead  under' 
the  stimulus  of  the  Zollverein,  which  swept 
away  all  the  petty  tariffs  that  had  isolated 
and  impoverished  its  kingdoms  and  duchies. 
A  fairly  liberal  policy,  aided  by  the  adoption 
of  a  gold  standard,  allowed  German  com- 
merce to  grow  rapidly,  and  London  benefited 
enormously  by  the  increasing  wealth  of 
Hamburg  and  Berlin.  France  clung  to  the 
bimetallic  system,  which  prevented  her  great 
stores  of  gold  and  capital  from  playing  their 
full  part  in  international  operations. 

In   Bagehot's   Lombard   Street   the   retro- 


80  THE  STOCK  EXCHANGE 

spective  eye  may  see  how  London  had  be- 
come, in  the  seventies,  the  great  centre  for  the 
investment  of  capital  and  for  the  diffusion  of 
credit.  With  the  suspension  of  specie  pay- 
ments by  the  Bank  of  France  during  the 
Franco-German  War,  its  use  as  a  reservoir  of 
specie  came  to  an  end.  "No  one  can  draw  a 
cheque  on  it  and  be  sure  of  getting  gold  or 
silver  for  that  cheque.  Accordingly,  the  whole 
liability  for  such  international  payments  in 
cash  is  thrown  on  the  Bank  of  England." 
Eight  years  after  Bagehot  wrote  these  words 
— in  1878 — the  Bank  of  France  resumed  specie 
payments.  But  it  could  not  recover  its 
position  as  a  European  settling  house.  And, 
as  every  banker  and  cambist  knows,  the 
stock  of  gold  at  Paris  and  Berlin  is  not  acces- 
sible, because  the  Bank  of  France  can  exercise 
an  option  to  pay  in  silver  at  the  old  conven- 
tional ratio,  and  the  Bank  of  Germany  can 
practically  prevent  gold  payments  when  they 
appear  inconvenient.  Thus,  by  a  concur- 
rence of  natural  and  fortuitous  circumstances 
with  the  restrictive  and  artificial  regulations 
imposed  by  potential  rivals,  the  number  of 
international  bills  drawn  on  London  incal- 
culably surpasses  those  drawn  upon  other 
centres.  It  is  the  greatest  shop,  the  greatest 


LONDON'S  FOREIGN  MAEKET      81 

store,  the  freest  market  for  commodities, 
gold  and  securities,  the  greatest  disposer  of 
capital,  the  greatest  dispenser  of  credit,  but 
above  and  beyond,  as  well  as  by  reason  of  all 
these  marks  of  financial  and  commercial 
supremacy,  it  is  the  world's  clearing  house. 
The  wealth  which  it  thus  acquires  and  dis- 
poses is  vaster  far  than  in  the  days  of  Bagehot, 
when  the  London  Money  Market  was  usually 
dependent  on  the  Bank  of  England.  Now,  in 
normal  times,  it  can  finance  itself.  In  Bage- 
hot's  time  the  output  of  capital  issues  or  loans 
to  British,  foreign,  and  colonial  borrowers 
would  vary  from  twenty  to  thirty  millions  a 
year.  In  1910  the  figure  went  far  above  200 
millions.  A  single  illustration  may  be  given 
of  London's  banking  power. 

In  1908,  after  the  great  American  panic, 
the  United  States  Government  appointed  a 
Commission  to  suggest  monetary  and  bank- 
ing reforms.  The  Commissioners  came  over 
to  Europe  and  made  close  inquiries.  Their 
interviews  with  leading  bankers  in  London, 
Paris  and  Berlin,  which  have  lately  been 
published,  constitute  an  invaluable  accumu- 
lation of  ascertained  facts  and  authoritative 
opinions.  At  the  Bank  of  England  they 
learned  how,  in  times  of  stress,  its  rate 


82  THE  STOCK  EXCHANGE 

dominates  and  controls  all  the  money  markets 
and  gold-movements  of  the  world.  The  crisis 
which  broke  out  in  New  York,  in  October 
1907,  was  the  most  formidable  of  its  kind 
ever  known.  There  had  never  been  such  an 
enormous  demand  for  gold;  yet  the  drain 
was  successfully  met,  and  practically  all  that 
the  American  banks  required  was  supplied 
in  a  few  weeks  from  London  without  any 
dangerous  depletion  of  the  Bank's  reserve. 
On  October  31st  the  total  bullion  held  by 
the  Bank  was  31  millions,  and  the  Bank  rate 
was  raised  to  5|  per  cent.  On  November  4th 
it  was  raised  to  6  per  cent.,  and  on  November 
7th  to  7  per  cent.,  the  total  bullion  held  being 
28  millions.  This  rate  proved  effective 
and  from  that  time  the  inflow  of  gold  from 
abroad  exceeded  the  outflow  to  New  York, 
so  that  on  December  llth  the  total  bullion 
was  34  millions.  Gold  came  to  London 
from  twenty-four  countries,  including  British 
colonies;  and  by  the  end  of  January,  when 
the  rate  had  been  gradually  reduced  to  4  per 
cent.,  the  Bank  of  England's  stock  of  gold 
had  risen  to  38  millions  sterling. 

With  this  supremacy  as  bullion  broker  and 
arbiter  of  credit,  as  disposer  of  cash  for 
short  periods  and  lender  of  capital  to  foreign 


LONDON'S  FOREIGN  MARKET      83 

I 
and  colonial  borrowers,  it  is  no  wonder  that 

London  through  its  Stock  Exchange  should 
provide  the  world's  principal  market  in 
foreign  securities.  Paris,  of  course,  has  its 
specialities.  It  is  financier-in-chief  to  Russia, 
Spain,  and  Turkey.  But  the  London  Stock 
Exchange  list  of  foreign  securities  has  no  rival. 
Hardly  a  country,  from  the  gilt-edged  rentes 
of  France  to  the  comparatively  worthless 
paper  of  Honduras,  whose  stocks  are  not 
dealt  in  freely  from  day  to  day  by  the  lead- 
ing jobbers  of  our  foreign  market.  Their 
observation,  "with  extensive  view,  surveys 
mankind  from  China  to  Peru.'' 

The  taste  of  the  British  public  for  invest- 
ment abroad  has  grown  rapidly  with  the 
increasing  overflow  of  our  surplus  capital. 
Perhaps  we  are  a  little  too  much  inclined  to 
trust  the  foreigner.  Certainly  there  is  often 
a  want  of  discrimination.  A  bond  yielding 
4|  or  5  per  cent.,  with  a  fairly  strong  power 
like  Japan  or  a  prosperous  country  like 
Argentina,  or  a  promising  railway  behind 
it,  may  be  pretty  safe;  but  for  the  sake  of  an 
extra  1  per  cent,  a  certain  type  of  investor 
is  willing  to  run  a  serious  risk  of  losing  his 
capital  in  some  dishonest  municipality,  or 
discredited  government,  or  in  a  company 


84  THE  STOCK  EXCHANGE 

formed  abroad  for  the  very  purpose  of  de- 
frauding him.  Many  persons  who  read  these 
pages  may  probably  have  received  ingenious 
circulars  suggesting  that  risks  can  be  avoided 
by  a  geographical  distribution  of  capital,  and 
that  in  this  way  a  high  yield  can  be  secured 
without  danger.  It  is  at  first  sight  a  taking 
fallacy.  But  a  single  question  will  discover 
and  expose  it.  How  can  four  rotten  com- 
panies, located,  let  us  say,  in  Brazil,  Costa 
Rica,  Portugal  and  Russia  be  made  less  rotten 
by  the  fact  that  they  are  widely  separated? 

Our  markets  for  foreign  bonds  and  foreign 
railway  securities  stand,  of  necessity,  in  close 
connection  with  the  foreign  bourses  on  which 
the  same  or  allied  securities  are  quoted.  In 
some  cases,  where  the  credit  of  a  country 
rests  almost  entirely  on  its  credit  in  London, 
the  tone  of  the  London  market  will  dominate 
the  tone  of  the  domestic  bourses.  The  dis- 
tribution of  British  capital  is  a  subject  which 
more  properly  belongs  to  a  later  chapter. 
But  it  should  here  be  plainly  stated  that  our 
foreign  trade  and  the  supremacy  of  the  Lon- 
don Stock  Exchange  in  international  stocks 
depend  mainly  upon  our  exports  of  capital. 
Thus  London  holds  a  great  part  of  the  ex- 
ternal debt  of  Japan,  and  the  price  of  Japa- 


LONDON'S  FOREIGN  MARKET      85 

nese  bonds  depends,  therefore,  mainly  upon 
London's  judgment  of  Japan's  financial 
strength  at  any  given  time.  The  internal 
bonds  are  mainly  held  in  Japan,  yield  a 
higher  rate  of  interest,  and  stand  on  a  more 
independent  footing.  Again,  the  great  Ar- 
gentine railways  are  British  companies,  with 
their  head  offices  in  London,  so  that  London 
is  the  principal,  if  not  the  sole  market,  for 
their  bonds  and  shares.  The  external  debt 
of  the  Argentine  Government  is  also  held 
mainly  in  London,  where,  in  fact,  the  greater 
part  of  it  has  been  issued  at  various  times  by 
Barings  and  other  London  houses. 

British  investments  in  Argentina — Govern- 
ment debt,  railways,  land  companies,  ranches, 
etc. — run  to  several  hundred  millions  sterling. 
Smaller,  but  still  important,  are  our  holdings 
in  Brazil,  Chili,  Peru,  and  Mexico.  The 
London  house  of  Rothschild  is  the  agent 
and  guardian  of  Brazilian  finance,  a  delicate 
and  difficult  task.  The  instability  of  the 
Latin  republics  of  South  America  is  pro- 
verbial. Upon  the  whole,  the  Governments 
of  Argentina  and  Chili  enjoy  the  best  credit, 
but  the  security  of  a  good  Argentine  or  Bra- 
zilian railroad  is  often  preferred  to  that  of 
the  Government,  and  is  certainly  superior 


86  THE  STOCK  EXCHANGE 

to  the  credit  of  municipal  or  provincial 
securities,  among  which  there  have  been 
many  defaulters.  It  is  hardly  possible  to 
speak  of  "investment"  in  Central  America. 
At  present,  any  one  who  buys  the  paper  of 
those  States  is  a  mere  speculator.  Bank- 
ruptcy and  repudiation  are  the  rule,  payment 
of  interest  the  exception.  Even  in  South 
America,  a  public  authority  which  has  not 
within  the  last  thirty  years  repudiated  its 
debt  or  compounded  with  its  creditors  is  a 
rare  exception.  No  doubt,  as  civilisation 
advances  and  trade  expands,  South  America 
gradually  becomes  a  safer  and  safer  field  for 
the  investment  of  savings.  But  the  utmost 
care  should  be  exercised,  especially  when 
seductive  offers  of  (unmarketable)  bonds  are 
received  through  the  post.  It  is  essential 
that  the  security  should  be  quoted  on  the 
London  Stock  Exchange,  but  even  then  the 
price  quoted  may  be  an  old  one  at  which  it 
is  easy  to  buy,  but  impossible  to  sell.  The 
amateur  investor  should  make  a  selection, 
and  then  consult  a  good  broker  on  the  London 
Stock  Exchange  as  to  present  prices  and 
prospects. 

After  the  Stock  Exchange  of  London,  that 
of   Paris    stands    next    as    an    international 


LONDON'S  FOREIGN  MARKET      87 

!  factor,  because,  after  London,  Paris  has  the 
greatest  amount  of  disposable  capital  both 
in  the  short  and  the  long  loan  market. 
The  annual  overflow  of  British  savings  into 
foreign  and  colonial  investments  may  now 
perhaps  reach  200  millions  sterling;  the 
average  overflow  of  French  savings  is  perhaps 
a  quarter  of  that  sum.  For  their  size,  Hol- 
land and  Belgium  contribute  freely,  but  Ger- 
many requires  most  of  her  savings  for  home 
investment,  and  the  United  States  still  con- 
sumes more  new  capital  than  it  produces. 

The  French  divide  their  bourses  into  two 
kinds — commercial  exchanges  (bourses  de  com- 
merce) and  stock  exchanges  (bourses  des 
valeurs) .  Their  history  goes  back  to  mediaeval 
times,  but  the  clearly  marked  division  be- 
tween the  two  is  comparatively  modern.  The 
merchandise  brokers,  who  operate  on  the  com- 
mercial exchanges,  are  called  courtiers  en 
marchandises.  The  operators  on  stock  ex- 
changes are  called  agents  de  change.  Under 
the  old  regime  both  professions  were  mono- 
polised, and  both  were  thrown  open  after 
the  Revolution.  The  merchandise  brokers 
are  still  free,  but  after  various  changes  the 
French  stock-broker  is  now  again  a  privileged 
person  with  exclusive  rights,  not  only  to 
trade  in  government  and  other  officially 


88  THE  STOCK  EXCHANGE 

quoted  securities,  but  also  to  negotiate  bills 
of  exchange  and  similar  instruments  of  credit. 
The  stock-brokers  of  Paris  number  only 
seventy,  and  form  a  close  corporation  under 
Government  control.  The  provincial  bourses, 
of  which  Lyons,  Bourdeaux,  Marseilles,  Lille, 
and  Nantes  are  the  most  important,  are  very 
similarly  organised. 

According  to  M.  Vidal,  the  author  of  a 
brilliant  study  on  this  subject,  the  mono- 
poly of  stock-brokers  and  the  privileges  of 
the  Paris  Bourse  rest  upon  legislation  of 
1807  and  1816.  A  stock-broker  really  owns 
an  office  under  Government,  which  holds 
from  him  a  bond  for  125,000  francs,  on  which 
be  receives  4  per  cent.  When  he  withdraws 
from  business  he  has  a  right  to  sell  his  office 
ard  transfer  the  bond  to  a  successor  whom  he 
introduces  to  the  Government.  Year  by  year 
this  monopoly  of  the  stock-broker  increases  in 
value  as  business  and  commissions  multiply. 
But  the  Government  occasionally  modifies 
conditions,  as  in  1898,  when  it  increased  the 
number  of  Paris  stock-brokers  from  60  to  70. 
At  first,  the  Paris  Bourse  was  forbidden  to 
quote  foreign  securities,  but  this  prohibition 
was  removed  in  1823.  But  many  securi- 
ties are  not  quoted  in  the  official  list  of  the 
Paris  Bourse,  either  because  the  stock-brokers 


LONDON'S  FOREIGN  MARKET      89 

(possibly  under  Government  inspiration)  have 
not  chosen  to  admit  them,  or  because  they  do 
not  fulfil  statutory  conditions.  Such  securi- 
ties, however,  may  be,  and  often  are,  dealt  hi 
on  the  coulisse,  which  may  be  described  as 
the  curb  market,  so  called  because  in  former 
times  the  bankers  and  coulissiers  thronged  a 
narrow  passage  called  La  Coulisse.  Anybody 
may  become  a  coulissier,  or  outside  broker, 
who  likes  to  pay  the  licence  duty.  And 
while  dealings  in  French  rentes  are  by  law 
restricted  to  the  stock-brokers  who  deal  on 
the  parquet,  a  market  in  these  exists  and  is 
tolerated  on  the  coulisse,  though  the  trans- 
actions of  coulissiers  in  these  securities  are 
not  recognised  by  courts  of  law. 

Among  foreign  bourses,  from  this  interna- 
tional standpoint  of  the  foreign  market,  Paris 
stands  easily  first  in  power  and  resources. 
The  capital  exports  of  France  have  long  been 
on  a  substantial  scale,  and  consequently  its 
holdings  of  foreign  securities  are  very  large. 
It  is,  of  course,  the  great  market  for  Russian 
bonds;  it  holds  most  of  the  Spanish,  Portu- 
guese, and  Turkish  debt,  and  has  considerable 
amounts  of  capital  invested  in  Egypt,  Tunis, 
Roumania,  Greece,  and  South  America.  Ac- 
cording to  a  skilful  but  perhaps  exaggerated 


90  THE  STOCK  EXCHANGE 

valuation  of  M.  Alfred  Neymarck,  the  foreign 
securities  now  held  by  French  capitalists 
(Government  bonds  included)  exceed  32  bil- 
lion francs,  say  £1,300,000,000,  distributed  in 
round  figures  as  follows:  — 

Foreign  French  Investments  Francs, 

by  Countries. 

1  Russia     ....  9,500,000,000 

2  Spain  and  Portugal  .          .  3,500,000,000 

3  Egypt  and  Suez  Canal       .  3,500,000,000 

4  Roumania  and  Greece       .  3,500,000,000 

5  Argentine,       Brazil      and 

Mexico          .          .          .  2,750,000,000 

6  Tunis  and  French  Colonies  2,500,000,000 

7  Austria  and  Hungary         .  2,000,000,000 

8  Italy        ....  1,150,000,000 

9  China  and  Japan      .          .  1,000,000,000 

10  United  States  and  Canada  750,000,000 

11  Great  Britain  .          .          .  500,000,000 

12  Belgium  and  Holland        .  500,000,000 

13  Germany          .          .          .  500,000,000 

14  Turkey,         Servia        and 

Bulgaria       .          .          .      500,000,000 

15  Switzerland  500,000,000 


Total        .          .          .  32,650,000,000 

At  the  end  of  1910  M.  Neymarck  raised  his 
aggregate  to  35  billion  francs.    If,  then,  we 


LONDON'S  FOREIGN  MARKET      91 

take  Mr.  Paish's  not  ungenerous  estimate  of 
£3,500,000,000  as  the  round  figure  total  of 
British  investments  abroad  the  French  aggre- 
gate is  considerably  more  than  one-third  of 
the  British.  It  is  roughly  equal  to  the 
French  national  and  municipal  debt;  for 
there  are  26  billion  francs  of  3  per  cent, 
rentes,  and  6  or  7  millions  of  municipal  and 
other  lottery  bonds,  nearly  all  held  by  French 
investors.  M.  Neymarck  further  estimates 
that  in  normal  years  the  French  people  put 
aside  in  savings  about  £70,000,000,  of  which 
a  variable  fraction  goes  abroad.  This  seems 
small  compared  with  British  capital  invest- 
ments (amounting  this  year  to  250  millions 
sterling),  which,  of  course,  only  represent 
a  portion  of  our  national  savings;  but 
it  is  a  very  large  sum  compared  with  other 
countries.  Germany's  wealth  is  probably  in- 
creasing more  rapidly  than  that  of  France, 
but  its  annual  surplus  is  usually  absorbed 
by  the  requirements  of  the  Imperial  and  State 
Governments  and  of  the  municipalities,  whose 
debts  have  been  increasing  at  a  prodigious 
rate,  as  well  as  by  the  demands  of  a  trade 
which  is  largely  carried  on  on  credit.  Hence 
it  is  that  the  great  Stock  Exchanges  of  Ger- 
many— Berlin,  Hamburg  and  Frankfurt — are 


92  THE  STOCK  EXCHANGE 

almost  entirely  concerned  with  imperial,  state 
and  municipal  loans,  with  German  bank- 
shares  and  German  "industrials."  But  as  the 
banks  and  industrial  companies  have  branches 
in  many  foreign  countries — the  whole  world 
swarms  with  German  commercial  travellers 
— a  very  large  amount  of  German  capital 
must  be  employed  abroad,  more  especially  in 
Russia,  Scandinavia,  Italy,  the  Low  Coun- 
tries and  South  America.  The  total  German 
capital  employed  abroad  has  been  variously 
estimated  at  from  500  to  1,000  millions  ster- 
ling. But  there  are  no  accurate  figures.  Ber- 
lin operators  often  speculate  heavily  in 
London.  The  Berlin  Bourse  consists  of  two 
departments,  the  Stock  Exchange  and  the 
Produce  Exchange,  and  both  are  supervised 
by  the  Chamber  of  Commerce.  The  Stock 
Exchange  had  1,329  members  in  1909;  but 
over  3,000  other  persons  held  cards  of  admis- 
sion entitling  them  to  go  on  the  floor  of  the 
Stock  and  Produce  Exchanges.  In  1899  the 
Berlin  Stock  Exchange  had  1,625  members. 
The  figures  for  1909  were  the  lowest  since 
1898.  The  Berlin  Stock  Exchange  List  is  a 
four-page  sheet,  and  it  includes  in  its  official 
quotations  a  large  number  of  continental  state 
loans,  foreign  railways,  banks,  etc.  The 


LONDON'S  FOREIGN  MARKET      93 

Stock  Exchanges  of  Frankfurt  and  Hamburg 
are  also  of  more  than  national  importance. 
Big  German  loans  are  usually  issued  simul- 
taneously by  a  "consortium"  of  banking 
houses  in  all  the  chief  cities  of  the  federated 
empire. 

The  Dutch  people  are  very  active  specu- 
lators, particularly  in  oil  companies  and  in 
inferior  sorts  of  American  railroad  securities. 
The  Amsterdam  Bourse  is  in  close  communi- 
cation with  the  London  Stock  Exchange. 
The  Brussels  Bourse  looks  to  both  Paris  and 
London.  Its  speciality  lies  in  tramway  com- 
panies, of  which  it  was  the  pioneer.  It  has 
established  tramway  systems  with  valuable 
concessions,  or  "street  franchises,"  in  all 
parts  of  the  world.  At  Antwerp — a  great  and 
growing  port  and  emporium — speculation  is 
busy  with  raw  products  such  as  wool,  rubber, 
and  coffee.  The  free  port  of  Hamburg  is 
another  huge  emporium,  and  its  trade  breeds 
lively  speculation  in  sugar,  coffee,  etc.  But 
its  Stock  Exchange  and  money  market  play 
an  important  part,  and  a  crisis  in  Hamburg 
is  speedily  visited  upon  Copenhagen,  Stock- 
holm, Helsingfors,  and  the  old  Hanseatic 
towns;  for  Hamburg  is  the  chief  employer 
of  trading  capital  in  the  North  Sea  and  the 


94  THE  STOCK  EXCHANGE 

Baltic.  Thus  when  Hamburg  found  it  neces- 
sary to  contract  credit  and  draw  in  loans 
after  the  American  collapse  of  1907,  there 
followed  a  crop  of  banking  failures  in  Copen- 
hagen, as  well  as  troubles  in  Stockholm. 
Russian  trade  is  largely  in  the  hands  of 
Germany,  and  German  is  as  much  spoken 
as  Russian  in  the  bourse  of  St.  Petersburg. 
Thanks  to  its  high  tariff,  the  manufactures, 
commerce,  and  navigation  of  Russia  are  con- 
trolled by  monopolies  and  combinations, 
which  have  capitalised  the  tariff  in  much  the 
same  way  as  the  more  celebrated  "Trusts" 
of  the  United  States.  The  largest  of  these, 
"Prodameta"  (from  "prodet,"  to  sell,  and 
metal),  has  with  its  subsidiaries  a  capital  of 
£18,000,000.  There  are  similar  combinations 
in  coal,  petroleum,  and  navigation. 

But  the  Russian  public  has  too  little  cash 
and  too*  little  enterprise  to  drive  a  great 
business  in  stocks  and  shares.  Here,  as  else- 
where, the  Russian  Government's  repressive 
policy  makes  itself  felt.  The  "Birsha"  of 
St.  Petersburg  is  prohibited  from  dealing  in 
non-Russian  securities,  and  even  the  Russian 
banks  are  debarred  from  advancing  money  on 
foreign  securities.  Jews  and  foreigners  are 
also  prohibited  from  lending  money  on  mort- 


LONDON'S  FOREIGN  MARKET      95 

gage,  with  the  result  that  first  mortgages  in 
Russia  have  to  be  placed  at  8  or  9  per  cent, 
interest. 

The  St.  Petersburg  Bourse  is  much  smaller 
than  the  Stock  Exchanges  of  Glasgow,  Man- 
chester, or  Liverpool,  in  so  far  as  it  has  only 
56  authorised  brokers,  who  must  be  Russian 
subjects,  and  have  a  monopoly  of  dealings 
in  Russian  Government  bonds.  But  any 
person  introduced  by  a  broker  or  banker 
may  do  business  in  the  Birsha  on  payment 
of  a  half-yearly  subscription,  and  a  stranger 
may  even  be  introduced  for  the  day  for  a  fee 
of  one  rouble.  There  is,  therefore,  a  strange 
mixture  of  free  trade  and  monopoly.  The 
official  list  of  the  St.  Petersburg  Bourse  con- 
tains about  500  securities,  all  Russian,  the 
chief  activity  being  in  the  shares  of  railways 
and  banks.  There  is  no  business  for  the 
account,  and  there  are  no  regular  settlements. 
All  stock  sold  must  be  paid  for  within  one 
or,  at  most,  two  days. 

The  two  principal  bourses  of  Spain  are 
in  Madrid  and  Barcelona,  and  of  late  years 
Madrid  has  become  the  more  important. 
But  Spanish  banking  and  finance  are  very 
largely  French;  for  Paris  still  controls  the 
principal  railroads  and  banks  of  Spain.  But 
Spanish  capital  is  growing,  and  the  people 


96  THE  STOCK  EXCHANGE 

are  beginning  to  own  a  large  and  ever  larger 
share  of  the  public  debt.  British  capital  is 
mainly  interested  in  mining  and  commercial 
enterprise,  especially  at  Bilbao,  Barcelona, 
Seville,  and  Juarez.  Spain  presents  a  close 
parallel  with  Italy.  Few  things  are  more 
remarkable  in  the  last  dozen  years  of  Euro- 
pean finance  than  the  great  upward  move- 
ment of  Spanish  and  Italian  credit.  In  both 
cases  the  improvement  may  be  traced  to  the 
abandonment  of  colonial  aspirations.  The 
costly  wars  of  Italy  in  Somaliland  and  Abys- 
sinia, and  of  Spain  in  Cuba  and  the  Philip- 
pines, drained  both  exchequers.  The  currency 
depreciated  and  the  national  credit  fell  very 
low.  In  fact,  in  1898  the  mean  price  of 
Italian  Fives  was  9  If ,  and  of  Spanish  Fours 
46J.  Taking  the  years  1898  and  1907,  and 
comparing  the  movements  of  European  credit, 
we  find  a  fall  of  19  in  British  consols,  of  6 
in  French  Threes,  and  of  11  in  German 
Threes,  while  Italian  Fives  rose  8,  and  Span- 
ish Fours  no  less  than  42  points. 

Unfortunately,  ten  years  of  progress  have 
been  checked,  in  the  case  of  Spain,  by  the 
Morocco  War  and  the  growth  of  internal 
troubles,  in  the  case  of  Italy  by  an  expensive 
military  and  naval  rivalry  with  Austria. 


LONDON'S  FOREIGN  MARKET      97 

Nevertheless  the  finances  of  Spain  and  Italy 
have  made  an  extraordinary  advance — all 
the  more  extraordinary  by  contrast  with  the 
general  downward  movement  in  gilt-edged 
stocks  as  well  as  in  the  best  railway  deben- 
tures during  the  last  ten  or  twelve  years. 

The  Italians  have  bought  up  their  debt 
(chiefly  held  in  France)  with  amazing  rapid- 
ity, and  are  hi  a  fan-  way  to  revive  their 
mediaeval  prowess  in  international  finance. 
The  chief  bourses  of  Italy  are  in  Rome,  Turin, 
Genoa,  and  Milan.  An  economic  and  Stock 
Exchange  crisis  occurred  in  1899-1900,  and 
again  in  1907-8.  Between  those  dates  Stock 
Exchange  values  expanded,  and  the  period  of 
prosperity  terminated  in  a  great  outburst  of 
speculation.  The  boom  began  in  January 

1905,  and  culminated  for  a  time  in  September. 
Then  came  a  set  back,  but  another  rapid  ex- 
pansion followed,  which  terminated  in  March 

1906.  The  most  popular  mania  was  for  motor 
car  company  shares.    The  25  lire  shares  of  one 
company  (the  Fiat)  were  actually  bought  up 
to  2,300  lire — 92  times  the  nominal  price  of 
issue.     The   company   then   subdivided   its 
shares.    In  November  1906  the  new  10  lire 
shares  stood  at  750.    By  October  1907  they 
had  fallen  to  80  lire,  and  by  May  1908  to  34 


98  THE  STOCK  EXCHANGE 

lire.  Turin  was  the  principal  market,  and 
the  speculative  mania  produced  even  more 
ridiculous  excesses  than  the  rubber  share 
mania  in  England.  What  remained  of  the 
bubble  was  pricked  in  the  autumn  of  1907, 
by  a  sudden  cessation  of  purchasing  from  the 
United  States,  when  luxurious  expenditure 
of  all  kinds  was  curtailed  after  the  fall  of  the 
Knickerbocker  Trust.  The  Stock  Exchange 
securities  of  Italy  consist,  first,  of  the  na- 
tional debt,  including  the  nationalised  rail- 
ways, second  banks,  third  mines,  fourth 
lighting  companies,  and,  lastly,  industrial 
companies  of  all  kinds,  representing  a  more 
or  less  watery  capitalisation  of  the  protec- 
tive tariff. 

More  interesting  to  British  investors  than 
either  Spain  or  Italy  are  the  two  great  rival 
powers  of  the  Far  East,  Japan  and  China. 
The  rise  of  Japan,  by  a  rapid  adoption  of 
Western  methods,  to  the  position  of  a  strong 
military  and  naval  power  (culminating  in 
its  defeat  first  of  China,  and  then  of  Russia) 
has,  of  course,  been  coincident  with  the  crea- 
tion of  a  very  heavy  debt  and  a  deplorably 
heavy  system  of  taxation.  As  Russia  leaned 
upon  Paris,  so  for  their  war  with  Russia  the 
Japanese  turned  to  London,  where  they  con- 


LONDON'S  FOREIGN  MARKET      99 

traded  very  large  loans  mostly  at  5  per  cent. 
Since  the  conclusion  of  peace  they  have  suc- 
ceeded in  keeping  their  expenditure  within 
their  income,  and  by  very  skilful  finance 
have  converted  most  of  their  debt  to  a  4J 
per  cent,  basis.  The  same  speculative  fever 
and  spirit  of  commercial  expansion,  which 
pervaded  Europe  and  America  in  1906  and 
1907,  invaded  Japan.  The  Stock  Exchanges 
of  Tokio  and  other  large  towns  were  scenes  of 
great  excitement,  and  when  the  American 
crash  came,  no  country  was  more  utterly 
prostrated  than  Japan,  dependent  as  it  is 
upon  the  United  States  market  for  its  silk 
and  other  exports.  A  great  many  failures 
ensued.  Banks  closed  their  doors,  and  some 
German  houses,  which  had  introduced  a  sys- 
tem of  long  credits,  came  to  grief.  Attempts 
to  introduce  British  capital  into  Japanese 
industrials  have  not  been  very  successful, 
though  some  of  the  best  Japanese  bank 
shares  have  found  favour.  But  a  very  large 
amount  of  Japanese  debt  is  held  in  London, 
and  the  Japanese  Government  keeps  ample 
floating  balances  on  this  side,  knowing  well 
how  to  support  the  market. 

In  quite  recent  years,  with  the  suspension 
of  borrowing  by  the  Japanese  Government, 


100          THE  STOCK  EXCHANGE 

the  attention  of  English  investors  in  the  Far 
East  has  been  directed  mainly  towards  China, 
India,  and  the  Malay  States.  The  awakening 
of  China  has  been  very  slow,  but  the  pace 
has  been  marvellously  quickened  in  the  last 
decade.  The  sagacity  and  trustworthiness  of 
the  Chinese  merchant,  and  the  marvellous 
industry  of  a  vast  population,  are  the  best 
securities  of  those  who  invest  in  the  new 
railways.  Against  the  honesty  of  the  nation 
have  to  be  placed  the  incapacity  and  corrup- 
tion of  the  Government.  There  is  grave 
danger  that  funds  subscribed  to  the  Govern- 
ment for  railway  loans  may  be  misused  or 
devoted  to  other  purposes.  But,  after  all, 
few  countries  can  boast  that  they  have 
been  free  from  railway  scandals,  and  there 
are  grounds  for  thinking  that  great  political 
reforms  may  ere  long  renovate  the  whole 
machinery  of  Chinese  administration.  The 
railways  already  built  appear  to  be  profitable, 
and  now  that  a  start  has  been  made,  it  seems 
certain  that  this  extraordinarily  promising 
field  will  absorb  and  find  profitable  employ- 
ment for  a  vast  amount  of  British  capital. 
There  is  no  reason  why,  eventually,  Chinese 
engineers  should  not  become  as  competent 
as  Chinese  bankers  and  merchants;  but 


LONDON'S  FOREIGN  MARKET     101 

until  the  mysterious  rlddb  of  China  lias 
been  a  little  further  unravelled,  the  investor 
in  Chinese  loans  must  regard  himself  as  some- 
thing of  a  speculator  who  deserves  a  rather 
high  interest  in  return  for  his  risk.  The 
Chinaman  is  not  only  a  shrewd  and  com- 
petent business  man:  he  is  also  a  confirmed 
and  incurable  gambler.  From  time  to  time 
the  Shanghai  Stock  Exchange  becomes  a 
scene  of  the  wildest  speculation,  and  it  is 
safe  to  predict  that,  when  a  new  China  is 
evolved,  Stock  Exchanges  will  spring  up  in 
all  the  large  towns,  and  China  will  become 
subject  to  vicissitudes  and  crises  as  violent 
as  those  which  convulse  the  United  States. 
Of  this,  a  foretaste  was  afforded  in  the 
spring  and  summer  of  1910,  when  Shanghai 
caught  the  rubber  infection  from  London. 
All  classes  and  races  took  part,  but  the  native 
Chinaman  plunged  deepest.  When  the  break 
in  prices  came,  one  Chinese  operator  was  so 
heavily  involved  that,  on  his  failure,  many 
of  the  native  banks  had  to  suspend  payment, 
with  the  result  that  for  months  the  trade 
and  credit  of  this  great  shipping  and  business 
centre  were  disorganised. 


CHAPTER  IV 

WALL   STREET 

A  FAR-SIGHTED  and  experienced  operator, 
who  lately  retired  from  the  New  York  Stock 
Exchange,  has  encouraged  me  to  attempt  a 
brief  sketch  of  the  American  system  (centred 
in  New  York)  from  the  standpoint  both  of  an 
investor  and  of  a  speculator.  On  the  other 
side  of  the  Atlantic,  indeed,  an  adventurous 
element  enters  almost  invariably  into  almost 
every  investment,  and  Wall  Street  is  the 
synonym  for  speculation.  The  Marble  Stock 
Exchange  of  New  York  stands  in  Broad 
Street*  But  the  great  banks  are  in  Wall 
Street.  Wall  Street  is  the  nerve-centre  of  the 
richest  and  most  speculative  country  in  the 
world.  It  stands — in  the  popular  mind — for 
all  that  is  sinister  in  American  politics,  all 
that  is  reprehensible  in  American  business,  all 
that  is  vast  and  hazardous,  all  that  is  covetous 
and  unscrupulous  in  high  or  low  finance.  It 
is  a  term  that  covers  a  multitude  of  things  and 
102 


WALL  STREET  103 

provokes  a  multitude  of  thoughts  in  every 
true  American.  For  Wall  Street  is  the  ac- 
cepted mirror  and  barometer  of  all  American 
business.  There,  as  in  a  magnified  Monte 
Carlo,  fortunes  are  won  and  lost,  if  not  by  the 
hour  or  the  day,  at  least  by  the  week  or 
the  month.  There,  too,  the  great  trusts  are 
organised;  there  receiverships  and  profitable 
reconstructions  are  arranged;  there  sensa- 
tional dividends  and  other  surprises  are 
hatched,  by  the  insiders  for  the  outsiders; 
there  melons  are  cut;  there  all  things  and 
most  persons  are  "done"  in  a  strictly  financial 
sense.  (But  the  secret  of  Wall  Street's  su- 
premacy lies  in  the  power  of  its  banks  as 
manufactories  and  curtailers  of  credit?)  Hence 
it  is  not  merely  a  market  of  bonds  and  shares, 
not  merely  a  recorder  but  a  manipulator  and 
controller  of  prices.  One  thing  about  Wall 
Street  that  strikes  the  most  casual  visitor  is 
its  purely  American  character.  It  takes  no 
interest  whatever  in  European  securities.  It 
only  cares  for  Europe  because  Europe  cares 
for  America  by  taking  an  interest  in  American 
securities. 

Just  as  our  Wall  Brook  marks  the  line  of 
the  old  Roman  wall  of  Londinium,  so  Wall 
Street  marks  the  old  Dutch  wall  of  the  little 


104          THE  STOCK  EXCHANGE 

Dutch  Colony  of  New  Amsterdam;  but  its 
financial  story  goes  back  hardly  more  than  a 
century.  In  1790,  the  year  after  the  adoption 
of  the  Constitution,  Hamilton  reported  to 
Congress  the  plan  of  a  national  bank.  In 
1791,  despite  opposition  from  Madison,  Jef- 
ferson and  other  powerful  men  (who  held  a 
central  bank  to  be  unconstitutional,  because 
the  individual  States  had  not  delegated  bank- 
ing authority  to  Congress),  the  bill  was  passed 
and  signed  by  Washington.  The  Bank, 
which  was  located  in  Wall  Street,  was  mod- 
elled on  the  Bank  of  England.  Its  charter, 
limited  to  twenty  years,  expired  in  1811,  and 
was  not  renewed.  The  dissolution  of  the 
iBank  not  only  deprived  the  country  of  a  large 
foreign  capital,  which  could  ill  be  spared,  but 
was  one  of  the  causes  that  led  in  1814  to  the 
suspension  of  specie  payments  in  most  of 
the  States  of  New  England.  The  second 
Bank  of  the  United  States,  which  lasted  from 
1816  to  1832,  was  established  in  Philadelphia. 
But  the  financial  prerogative  of  New  York 
may  fairly  be  dated  from  the  year  1791,  when 
it  became  for  a  time  the  depository  of  the 
funds  of  the  United  States  Government  and 
the  seat  of  its  financial  operations. 

Faint  echoes  of  Wall  Street's  early  days 


WALL  STREET  105 

were  still  heard  in  1880.  In  a  gossipy 
chronicle  of  that  year  we  read:  "The  names 
of  the  old  merchants  who  went  down  to  the 
sea  in  ships,  and  of  the  money-changers  and 
high  treasurers  who,  in  those  days,  were  wont 
to  come  into  the  Street  to  draw  from  or 
deposit  in  the  United  States  Bank,  the  Man- 
hattan Company,  or  the  Bank  of  New  York, 
to  inquire  for  the  quotations,  or  to  exchange 
views  on  the  state  of  the  market,  are  almost 
forgotten.  But,  moving  about  among  these 
phantom  groups,  we  recognise  the  stateliest 
figure  of  all,  that  of  Alexander  Hamilton. 
Then  we  see  new  banks  set  up  and  operations 
slowly  widening  through  the  terms  of  five 
Presidents.  But  it  is  only  within  the  past 
forty-five  years  that  Wall  Street  has  got  a 
special  significance  as  the  centre,  not  only  of 
money  but  of  speculation.  From  1835  to 
1880  a  series  of  great  inflations  and  corre- 
spondent depressions  occurring  there  furnish 
a  most  protracted,  singular  and  striking 
chapter  in  the  annals  of  finance."  We  may 
now  add  that  the  thirty  years  which  have 
passed  since  1880  have  been  at  least  as  strik- 
ing and  remarkable. 

The  early  history  of  public  finance  in  the 
United   States    was    sadly   marred   by    dis- 


106          THE  STOCK  EXCHANGE 

honesty,  and  this  dishonesty  may  probably 
be  traced  to  the  bad  traditions  of  currency 
that  came  from  the  colonial  days.  The  de- 
basement of  a  paper  currency  was  a  favourite 
device  for  reducing  foreign  debts,  and  new 
issues  of  paper  were  often  made  when  a 
colony  was  in  need  of  money.  These  ruinous 
expedients  not  only  debased  public  credit  and 
public  money,  they  also  undermined  confi- 
dence and  lowered  the  character  of  banking 
and  mercantile  transactions.  The  establish- 
ment of  the  Federal  Union  and  of  the  United 
States  Bank  led  to  an  improvement;  but  from 
time  to  time  suspension  of  payments  oc- 
curred, individual  states  repudiated  their 
debts,  and  vicious  currency  legislation  caused 
widespread  loss,  distrust  and  confusion,  by 
which  insiders  with  knowledge  grew  rich  at 
the  expense  of  the  community.  Possibly, 
indeed  probably,  the  speculative  temper  of 
the  American  people  is  derived  from  the  ups 
and  downs  of  its  currency;  certainly  many  of 
the  worst  financial  crises  may  be  traced  di- 
rectly or  indirectly  to  unsound  money  and  the 
insecure  basis  of  credit.  But,  besides  this,  the 
rarefied  air  of  New  York  acts  like  champagne 
upon  a  nervous  and  excitable  population. 
The  association  known  as  the  New  York 


WALL  STREET  107 

Stock  Exchange  was  formed  at  the  beginning 
of  the  nineteenth  century  by  a  baker's  dozen 
of  stock-dealers,  who  met  under  a  sycamore 
tree  in  Wall  Street,  opposite  to  the  present 
banking  house  of  Brown  Brothers  &  Co.,  and 
would  job  off  small  lots  of  "governments,"  or 
stock  in  the  Manhattan  Company  and  Bank 
of  New  York.  In  1816  there  was  a  permanent 
organisation  of  28  members,  and  in  1837 — 
when  Rothschild's  agents  in  New  York,  the 
big  firm  of  Josephs,  fell  with  a  crash — the 
New  York  Stock  Exchange  had  become  a 
power  and  a  danger  to  a  community  which 
was  rapidly  developing  a  thirst  for  stock  and 
share  speculation.  But  in  the  year  1862 
there  sprang  up  a  formidable  competitor 
called  at  first  the  Public  Board  and  later  the 
Open  Board  of  Brokers.  This  was  the  time 
of  the  Civil  War.  The  printing  presses  of  the 
North  were  issuing  greenbacks  by  the  million. 
Ruined  merchants  turned  in  despair  to 
speculation,  and  flocked  to  the  "coal  hole," 
as  the  subterranean  department  in  William 
Street  was  called,  where  the  first  sessions  of 
this  Public  Board  were  held.  According  to 
a  contemporary  who  witnessed  these  scenes, 
"lawyers  whose  tastes  were  speculative  rather 
than  litigious,  more  than  one  clergyman 


108          THE  STOCK  EXCHANGE 

whose  pastoral  labours  were  unremunera- 
tive,  broken-down  operators,  merchants  out 
of  business,  clerks  out  of  situations,  Jews 
'native  and  to  the  manner  born/  as  well  as 
the  greenest  and  most  unsophisticated  parties 
from  the  rural  districts,  swelled  the  motley 
throng."  The  ups  and  downs  of  the  war,  dis- 
torted by  telegraphic  manipulations,  helped 
the  brokers  and  commission  agents  and 
money-changers;  for  rapid  fluctuations  in 
greenbacks  and  stocks  of  all  kinds  held 
together  an  active  crowd  of  speculators. 
A  sharp  competition  arose  between  the  Old 
Board  and  the  New.  The  New  offered  to  do 
business  at  ^  brokerage,  i.  e.  3  dollars  and 
12  cents  on  a  hundred  shares.  The  Old  Board 
thereupon  lowered  its  commission  rates  from 
J  per  cent,  to  |  per  cent.,  and  resolved  to  expel 
any  member  who  dealt  with  the  rival  body. 
Meanwhile  the  Wall  Street  soil  produced  of 
a  sudden  a  wondrous  mushroom  growth  of 
bankers  and  brokers.  "The  basements  of 
William,  Wall  and  Broad  Streets  and  of  Ex- 
change Place  seemed  to  have  been  suddenly 
penetrated  with  innumerable  burrows  in- 
habited by  new  and  singular  animals — mostly 
rodents — gnawing  at  the  vast  cheese  of  spec- 
ulation." Promoters  offered  the  usual  wild- 


WALL  STREET  109 

cat  schemes  that  appear  and  are  subscribed 
for  in  such  times — gold  claims  in  Colorado, 
copper  franchises  in  Wisconsin,  and  so  on. 
In  such  cases  distance  often  lent  enchantment 
to  the  view.  Fluctuations  of  the  currency 
during  the  war  made  all  transactions  hazard- 
ous. When  greenbacks  were  issued  it  was 
hoped  that  they  would  circulate  at  par  with 
the  gold  dollar.  But  early  in  1862  a  premium 
on  gold  appeared,  and  in  July  1864  the  pre- 
mium touched  285,  and  the  cash  value  of 
the  paper  dollar  fell  to  its  lowest  point — 36 
cents.  A  gold  exchange  was  opened  in  New 
York  called  the  Gold  Room,  which  at  one 
time  had  between  four  and  five  hundred 
members.  There  was  often  wild  speculation 
made  in  gold  futures,  and  on  one  celebrated 
Black  Friday  (September  24,  1869)  Jay 
Gould  and  others  made  a  corner  in  gold 
which  caused  heavy  losses  to  many  unfor- 
tunate merchants. 

Meanwhile  the  Open  Board  of  Brokers 
flourished  exceedingly,  and  in  1864  moved  to 
a  hall  in  16  Broad  Street.  But  after  the  war, 
when  amalgamations  came  into  favour,  the 
two  Boards  and  another  Board  for  the  buying 
and  selling  of  Government  bonds  were  united 
under  the  title  of  the  New  York  Stock  and 


110          THE  STOCK  EXCHANGE 

Exchange  Board,  the  same  whose  marble 
palace  now  fronts  on  Broad  Street.  In  this 
splendid  hall  business  is  conducted  in  strict 
accordance  with  an  elaborate  constitution 
and  by-laws.  Membership  is  restricted,  a 
seat  can  be  bought  only  at  a  very  high  price. 
Infringements  of  rules  are  severely  punished 
by  fine,  suspension,  or  expulsion.  It  differs 
from  the  London  Stock  Exchange  in  various 
ways.  First,  there  is  no  distinction  between 
jobbers  and  brokers.  All  members  are  both 
or  either.  Hence  there  is  only  one  transac- 
tion— no  middleman  stands  between  the 
public  and  the  market. 

This  first  distinction  the  New  York  Stock 
Exchange  has  in  common  with  all  the  Stock 
Exchanges  of  the  Old  and  the  New  World, 
so  far  as  we  are  aware.  The  jobber  is  a  Lon- 
don creation,  and  he  has  not  been  imitated. 
Whether  it  is  due  to  him  or  to  some  other 
cause,  such  as  the  banking  supremacy  of 
London,  that  the  stock  and  share  market  of 
London  is  the  freest  market  of  its  kind  in  the 
world  is  a  question  in  dispute,  and  one  that 
cannot  easily  be  answered.  The  New  York 
Exchange  also  differs  from  ours  in  the  rigidity 
of  its  commission  law.  A  New  York  broker 
charges  one-eighth  commission  per  cent,  on 


WALL  STREET  111 

the  par  value,  each  way,  neither  more  nor 
less.  This  is  very  profitable  work.  In  Lon- 
don of  course  by  arrangement,  especially 
when  the  business  is  on  a  large  scale,  lower 
rates  can  be  obtained  without  offending 
against  the  laws  and  rules  of  the  Stock  Ex- 
change. As  a  centre  of  speculative  activity 
New  York  has  no  rival.  The  publicity  of  its 
quotations  is  only  matched  by  the  rapidity 
with  which  they  are  circulated  to  the  most 
distant  towns  of  the  American  continent. 
This  is  all  due  to  the  tape  machine,  called 
"the  Ticker,"  an  American  invention  which 
has  been  developed  in  an  extraordinary  way 
during  the  last  thirty  years.  The  reliability 
of  tape  prices  is  remarkable,  and  any  mistake 
is  speedily  corrected.  The  tape  machine  is 
not  officially  recognised.  Nevertheless  its 
mechanical  efficiency  has  been  proved,  and  it 
contributes  an  invaluable  check  upon  dis- 
honest brokers.  Tape  machines  are  to  be 
found  all  over  the  States;  you  see  them  in 
secluded  health  resorts,  where  an  enterpris- 
ing New  York  broker  may  have  taken  a  room 
in  order  to  cater  for  the  adventurous  instincts 
of  the  tired  millionaire.  The  same  contri- 
vance enables  far  away  newspapers  to  give 
their  readers  a  complete  list  of  New  York 


THE  STOCK  EXCHANGE 

prices  on  the  following  morning.  But  for 
these  machines  and  their  extension  the 
volume  of  speculation  would  without  doubt 
be  reduced  enormously.  It  is  difficult  to  see, 
now  that  the  tape  machine  and  the  telephone 
have  been  perfected,  how  the  invention  of 
aids  and  facilities  to  speculation  can  go  much 
further.  By  these  means  the  actual  prices  of 
securities  and  the  alluring  bait  of  incessantly 
,  fluctuating  favourites  are  kept  before  a 
naturally  speculative  public  all  the  time* 
With  a  tape  machine  by  his  side  the  banker, 
the  merchant,  the  manufacturer  can  sip  the 
sweet  excitements  of  the  Stock  Exchange  in 
his  arm-chair.  To  watch  the  tape  machine 
is  the  main  business  of  some  and  the  main 
pleasure  of  others.  Certainly  this  invention 
is  the  grand  cause  of  the  expansion  of  specu- 
lative business.  If  it  could  be  extinguished 
the  Stock  Exchange  would  probably  be  de- 
nuded of  half  its  members  and  the  Other  half 
would  find  their  profits  heavily  reduced. 
The  whole  American  public  has  been  edu- 
cated to  the  "ticker."  Its  services  to  the  in- 
vestor must  be  set  against  the  stimulus  it  has 
given  to  gambling  on  the  Stock  Exchange. 
But  when  all  deductions  have  been  made — 
and  of  course  an  active  market  means  a  free 


WALL  STREET  US 

market  and  closer  quotations — it  can  hardly 
be  admitted  among  the  inventions  that  have 
made  the  world  more  civilised. 

The  fortnightly  settlements  of  London 
would  be  impossible  in  New  York,  though  it 
is  almost  incredible  to  an  English  broker  that 
the  day's  transactions  can  be  settled,  as  New 
York  settles  them,  by  the  day. 

On  one  record  occasion  the  Clearing-house 
settled  and  balanced  transactions  in  about 
3,200,000  shares,  of  an  approximate  value  of 
50  millions  sterling.  This  test  proved  con- 
clusively the  perfection  of  New  York's  finan- 
cial machinery  for  settling  Stock  Exchange 
transactions.  Brokers  obtain  their  funds 
through  two  species  of  loans,  called  respec- 
tively "Time"  loans  and  "Call"  loans. 
Tune  loans  are  made  for  a  specified  date. 
Call  loans  are  a  speciality  of  the  New  York 
market.  Brokerage  houses  in  ordinary  times 
carry  60  per  cent,  of  their  borrowings  in 
Tune  loans  and  40  per  cent,  in  Call  loans. 
Negotiations  for  time  money  are  carried  on 
directly  with  the  lenders  or  with  street 
brokers  they  select  to  represent  them.  Call 
loans  are  negotiated  on  the  Stock  Exchange 
much  after  the  manner  in  which  stocks  are 
bought  and  sold.  These  "Call"  loans  are 


114          THE  STOCK  EXCHANGE 

all  made  upon  collateral  which  must  have  an 
aggregate  market  value  of  at  least  20  per 
cent,  above  the  face  value  of  the  loan.  A 
call  loan  can  be  terminated  by  either  party 
the  next  day,  or  any  day  thereafter,  by  giv- 
ing notice  before  1  o'clock,  and  must  be  paid 
at  once  when  the  lender  calls  it.  Similarly 
in  London  bankers  lend  out  funds  "at  call 
or  short  notice." 

Before  noon  the  banks  and  Trust  compa- 
nies notify  their  brokers  in  what  is  called 
the  "money  crowd"  on  the  Stock  Exchange 
to  lend  a  stated  amount  of  money.  At  about 
2.30  in  the  afternoon  this  crowd  is  thickest 
and  noisiest.  By  then  the  Stock  Exchange 
knows  pretty  accurately  how  much  it  will  need, 
and  its  brokers  go  into  the  "crowd  "  to  bid 
for  what  they  want,  buying  money  from  the 
bankers'  agents  at  the  lowest  rate  obtainable. 

This  Stock  Exchange  money  market  of 
New  York  rests  upon  the  solid  economic  basis 
of  supply  and  demand.  Occasional  attempts 
are  made  to  manipulate  it,  but  generally 
without  result.  A  few  of  the  banks  and  Trust 
companies  never  ask  more  than  6  per  cent, 
per  annum  for  their  money,  even  in  times 
of  panic;  but  at  such  times  their  brokers, 
instead  of  offering  their  money  publicly,  go 


WALL  STREET  115 

about  privately,  selecting  the  most  reputable 
houses,  and  generally  ask  for  gilt-edged 
dividend-paying  securities  as  collateral,  and 
for  larger  margins  than  are  demanded  in 
quieter  times.  The  extreme  rates  that  are 
published  represent  loans  of  small  sums  to 
the  needy  and  poorer  class  of  borrowers.  If 
there  were  no  adequate  supply  of  call  money 
available  New  York  Stock  Exchange  methods 
would  have  to  be  changed.  The  daily  settle- 
ment is  universal  in  the  Stock  Exchanges 
of  the  United  States,  and  is  doubtless  one 
of  the  causes  why  failures  or  defaults  are  so 
commendably  rare. 

The  profession  of  broker  on  the  New  York 
Stock  Exchange  is  indeed  a  very  remunerative 
one.  Most  of  the  members  are  well  off  and 
many  of  them  are  rich.  Until  they  have 
saved  a  sufficient  capital  out  of  their  com- 
missions they  often  have  the  good  sense  to 
avoid  speculation.  But  when  they  once  have 
money  free  they  begin  to  invest  and  operate 
for  their  own  account,  or,  as  they  say,  "take 
an  interest  in  the  market."  A  clever  man  in 
this  position,  who  is  really  in  the  swim  and 
the  know,  can  usually  do  well  for  himself; 
and  it  is  surprising  how  many  of  these  pro- 
fessionals have  the  self-restraint  to  avoid 


116          THE  STOCK  EXCHANGE 

great  risks.  They  know  from  the  experience 
of  unfortunate  clients  the  danger  of  "over- 
trading," and  as  over-trading  is  the  character- 
istic vice  of  the  amateur  speculator  a  word 
here  may  be  in  season.  "The  rapid  expan- 
sion of  an  investor  into  a  speculator,"  said 
a  successful  Wall  Street  broker  to  the  writer, 
"is  one  of  our  most  familiar  sights."  A  man 
comes  down  to  a  broker's  office  with  five 
thousand  dollars,  and  says  he  wants  to  invest 
it  to  the  best  advantage.  The  broker  asks 
him  whether  he  wishes  to  make  a  pure  invest- 
ment or  whether  he  would  like  his  holding  to 
have  "a  speculative  tail"  to  it.  In  nine 
cases  out  of  ten  the  investor  admits  that  he 
had  the  idea  of  increasing  his  capital  in  mind 
when  he  came  there.  The  broker  then  ex- 
plains to  him  that  he  can  safely  buy  $10,000 
worth  of  securities,  on  which  he  can  pay  50 
per  cent.,  and  the  broker  will  lend  him  the 
balance  of  the  purchase  money  at  current 
rates  of  interest.  The  broker  says,  in  effect: 
"I  will  buy  you  ten  thousand  dollars'  worth 
of  stock  with  your  five  thousand  dollars,  and 
with  five  thousand  additional  dollars,  which 
I  will  borrow  for  you  from  month  to  month 
at  5  per  cent,  or  whatever  is  the  market  rate, 
as  long  as  you  like  to  hold  the  stock."  Our 


WALL  STREET  117 

investor  is  captivated  by  the  plan.  He 
neglects  the  possibility  of  a  fall,  in  which 
case  his  losses  are  doubled,  because  his  mind 
is  taken  up  with  the  probability  and  practical 
certainty  of  a  rise.  He  has  opened  his  ac- 
count in  Wall  Street  en  the  basis  of  what  is 
known  as  a  50  per  cent,  margin.  He  is  half 
investor,  half  speculator.  The  fluctuations 
of  the  market  begin  to  excite  him.  If  he 
loses,  he  wants  to  make  good  the  loss.  If  he 
gains,  his  appetite  for  more  is  whetted.  He 
hovers  about  Wall  Street  listening  eagerly 
for  points.  Presently  he  meets  a  tipster, 
who  suggests  something  better  and  hints  to 
the  novice  that  he  may  quadruple  his  gains 
if  he  contents  himself  with  a  25  per  cent, 
margin,  owning  only  a  quarter  of  the  stock 
which  is  to  make  his  fortune.  His  own  spec- 
ulative investment  begins  to  look  very  small 
and  slow  to  him,  as  he  listens  to  the  feverish 
and  exaggerated  talk  all  around  him,  and 
reads  the  inspired  utterances  of  the  secular 
and  financial  press.  The  temptation  to  in- 
crease his  risks  without  increasing  his  capital 
is  nearly  irresistible,  and  in  a  comparatively 
short  time  he  has  50,000  dollars'  worth  of 
stocks  with  only  the  same  original  capital  of 
5,000  dollars,  owing  his  broker  45,000  dollars 


118          THE  STOCK  EXCHANGE 

instead  of  5,000.  He  is  then,  of  course,  in  a 
position  in  which  a  small  decline  in  prices 
will  swamp  all  his  capital.  The  investor 
has  become  a  speculator,  in  reality  a 
plunger.  He  is  over-trading;  the  nerve  strain 
is  making  him  miserable,  but  he  can't  stop. 
A  10  per  cent,  decline  wipes  him  out.  No 
matter  how  good  a  security  may  be,  there 
are  many  unforeseen  events  which  may  cause 
a  fall  of  10  per  cent,  in  its  market  price 
without  affecting  in  the  least  its  real  value. 
But  such  temporary  fluctuations  seldom 
cause,  even  in  panics,  a  50  per  cent,  depre- 
ciation in  the  value  of  investment  securities, 
so  that  our  investor  would  have  been  com- 
paratively safe  if  he  had  not  yielded  to  the 
temptation  to  "over-trade."  But  whether 
his  capital  is  risked  or  not,  the  more  he  bor- 
rows and  the  more  he  shifts  his  securities  — 
the  greater,  in  fact,  the  cost  of  his  holdings 
in  interest  and  commissions — the  more  prob- 
abilities weigh  against  his  emerging  from 
Wall  Street  with  a  profit. 

In  his  Twenty  Years  of  Inside  Life  in  Wall 
Street,  Mr.  Fowler  relates  an  incident  of  this 
kind  which  may  be  condensed  to  serve  as  an 
illustration.  One  day,  in  January  1865,  a 
rough  farmer,  entering  the  office  of  a  Wall 
Street  broker,  produced  from  his  portly  wallet 


WALL  STREET 

two  documents,  the  first  a  certificate  of  good 
character  from  the  local  school-master,  the 
other  a  certificate  of  $£?300  deposit  in  the 
bank  of  his  native  village.  Next  he  spread 
out  on  the  table  a  cutting  from  a  newspaper 
headed  "Petroleum,"  setting  forth  that  the 
books  of  the  Sixtieth  National  Petroleum 
Company  were  still  open  to  subscription; 
capital  $1,000,000  in  $10  shares,  and  the 
Company  was  generously  allowing  the  public 
to  buy  them  at  $3  a  share.  The  property 
consisted  of  30  acres  in  the  very  midst  of 
the  oil  region,  quite  near  to  the  celebrated 
Buchanan  farm;  three  wells  already  sunk, 
and  room  for  more;  every  indication  of  oil;  a 
dividend  of  2  per  cent,  a  month  guaranteed; 
books  to  be  closed  positively  and  irrevocably 
on  the  21st  instant. 

"Them  air  Petrollum  shares  is  what  I've 
come  for.  Two  per  cent,  a  month  dividend 
is  enough  for  me,"  said  the  rustic.  This  was 
at  the  height  of  the  oil  boom.  The  brokers 
tried  hard  to  dissuade  their  client;  but  only 
by  quoting  the  agricultural  maxim,  "Don't 
put  all  your  eggs  in  one  basket,"  could  they 
prevail  on  him  to  invest  no  more  than  $1,300 
in  this  company,  keeping  the  balance  of  a 
thousand  for  other  tempting  opportunities. 
They  went  to  the  office  of  the  Petroleum 


120          THE  STOCK  EXCHANGE 

Company,  paid  in  the  money,  and  received 
certificates  for  433  shares.  The  investor 
was  charmed  with  the  certificates.  In  the 
foreground  was  engraved  a  flowing  well, 
sending  up  a  jet  100  feet  into  the  air  and  fall- 
ing in  a  graceful  parabolic  curve  into  a  huge 
tank  inscribed  with  the  company's  name. 
Near  by  was  a  pyramid  of  barrels,  and  in  the 
background  several  vessels  and  railroad  trains 
were  being  laden  with  petroleum.  The  petro- 
leum fever  had  raged  eight  months  and  cul- 
minated in  February,  after  bubble  companies 
with  a  nominal  capital  of  300  million  dollars 
had  been  organised.  A  special  Petroleum 
Stock  Exchange  had  been  created,  which, 
dying  soon  afterwards,  had  its  remains  incor- 
porated with  the  Mining  Stock  Board,  another 
product  of  another  contemporary  bubble. 

Five  months  afterwards  the  rustic  lost  faith 
in  petroleum,  and  sold  his  stock  at  10  cents  a 
share;  but  he  was  more  fortunate  with  his 
balance.  First  he  "sold  short"  in  gold  and 
made  $5,000.  Then  he  became  a  bull  of 
Erie  and  made  another  $5,000;  then,  in  spite 
of  his  brokers,  he  fell  into  the  claws  of  the 
Lobster.  They  lost  sight  of  him  for  three 
months  until  one  day  in  November,  when  he 
rushed  into  the  office,  crying:  "The  Lobster 
has  busted,  and  I'm  busted." 


WALL  STREET  121 

He  had  just  $200  left.  It  was  a  damp,  chill 
day;  every  one  looked  blue,  but  the  rustic's 
face  was  the  bluest  of  all.  They  took  him 
and  cheered  him  with  a  certain  beverage,  and 
then  found  that  the  poor  man  had  borrowed 
money  from  friends  in  his  village  to  meet  the 
demands  of  the  rapacious  Lobster  for  more 
margin.  The  debt  weighed  on  his  mind;  but 
at  this  point  an  operator  joined  them  in  high 
spirits.  He  had  just  made  a  little  pile  out  of 
a  heavy  fall  in  Prairie  du  Chien.  It  had 
already  fallen  to  91,  and  he  predicted  it  would 
fall  to  50  inside  of  the  week,  and  volunteered 
to  sell  calls  in  it  at  110  which  should  be 
deliverable  at  any  time  in  the  next  thirty 
days.  The  rustic's  face  brightened  and  he 
gave  this  new  friend  his  last  $200  for  a  call  of 
200  (hundred  dollar)  shares.  The  operator 
filled  out  a  form,  signed  it  and  sent  it  to  his 
broker,  who  guaranteed  it. 

The  document  would  run  as  follows :  — 

New  York,  November  — ,  1865. 
For  Value  received  the  Bearer  may  CALL 
ON  ME  for  Two  Hundred  Shares  of  the 
Ordinary  Stock  of  the  Prairie  du  Chien 
Company  at  110  per  cent,  at  any  time  in 
thirty  days  from  date.  The  bearer  is  entitled 


THE  STOCK  EXCHANGE 

to  all  dividends  or  extra  dividends  declared 
during  the  time. 

Signed : 

The  stock  called  Prairie  du  Chien,  or  Prairie 
Dog,  was  not  inconveniently  large  for  the  pool 
made  by  Stimpson  and  Marston  in  the  au- 
tumn of  this  year  (1865).  There  were  only 
about  29,000  shares  to  be  handled.  In  August 
the  stock  had  broken  to  33.  The  pool  pro- 
ceeded with  the  utmost  secrecy  to  buy  nearly 
all  the  stock.  On  the  Saturday  when  the 
rustic  bought  his  call  it  had  risen  to  par.  "  On 
the  following  Monday  it  sold  from  125  to  250 
in  twenty  minutes,  amid  the  fiercest  excite- 
ment ever  known  before  in  the  Brokers* 
Board." 

On  that  "black  bear  Monday,"  when  our 
hero  reached  the  lobby  of  the  Brokers'  Board 
Prairie  du  Chien  had  just  struck  200.  Trem- 
bling with  joy  he  fumbled  forth  his  lucky 
"call,"  sent  it  in  to  his  broker,  and  in  three 
minutes  had  sold  his  200  shares  at  210.  Ten 
minutes  later  he  "called"  upon  his  operating 
bear  friend,  who  bought  the  stock  at  225  and 
delivered  it  to  the  party  who  had  just  bought 
the  200  shares  at  210.  In  48  hours  the  two 
hundred  dollars  had  swollen  to  $20,000,  for 
each  of  his  two  hundred  100-dollar  shares  had 


WALL  STREET  123 

doubled  in  value  between  the  time  when  he 
bought  the  call  and  the  time  when  he  sold  it. 

After  this  happy  event  the  rustic  might 
have  retired  to  his  village  as  an  agricultural 
capitalist.  Unfortunately,  but  naturally 
enough,  history  relates  that  he  became  en- 
amoured of  "calls  and  puts."  He  never 
thought  of  returning  in  glory  and  comfort  to 
his  village,  but  hunted  for  new  opportunities 
in  the  street,  "until  one  fine  day  in  February 
he  heard  that  Henry  Keep  was  selling  calls 
in  Old  Southern  at  a  price  slightly  above  the 
market,  and  promptly  secured  calls  for  500 
shares  duly  signed  by  Henry  Keep.  Hearing 
of  Keep's  sales,  and  reasoning  that  Keep  was 
not  such  a  fool  as  to  sell  calls  on  Old  Southern 
if  it  were  going  to  rise,  the  bears  bought  his 
calls  freely  and  used  them  as  a  margin  to  sell 
short.  A  little  later,  when  the  price  had  risen 
considerably,  Keep  began  selling  "puts," 
also  on  favourable  terms.  Then  the  bulls 
bought  these  "puts"  and  used  them  as  mar- 
gins to  buy  Old  Southern.  Thus  the  wily 
operator  stiffened  the  price  doubly,  first  by 
inducing  short  sales  at  a  low  price,  next  by 
inducing  purchases  at  a  high  price. 

A  "put,"  be  it  remembered,  is  in  form 
exactly  like  a  call;  only  for  the  key  words 


124          THE  STOCK  EXCHANGE 

"CALL  ON  ME"  you  substitute  "DE-1 
LIVER  ME,"  so  that  while  the  person  who 
buys  a  call  does  so  in  hope  of  the  price  rising 
within  the  time  prescribed,  the  person  who 
buys  a  "put"  does  so  in  hope  of  it  falling.  Our 
hero  held  his  call  for  500  shares  until  Old 
Southern  touched  98,  when  he  "called,"  re- 
ceived the  stock,  sold  it  for  cash  at  100,  and 
netted  a  profit  of  $12,000.  Successful  and 
elated,  the  farmer  now  blossomed  out  as  a 
City  man,  sought  the  aid  of  a  fashionable 
tailor  and  cultivated  Wall  Street  society.  A 
new  acquaintance  dazzled  him  with  the  story 
of  the  Pacific  Mail.  Its  fluctuations  from 
1850  to  1864  had  scattered  fortune  and  ruin 
through  the  crowd  of  speculators.  In  Decem- 
ber 1861,  when  the  Trent  affair  threatened 
war  with  England,  it  had  fallen  to  69.  The 
capital  stock  was  4  million  dollars  in  40,000 
shares.  But  in  1862  a  powerful  ring  acquired 
26,000  shares,  which  were  transferred  to  a 
banking  firm  to  hold  as  trustees  for  five  years 
for  the  joint  benefit  of  members  of  the  ring. 
After  1864,  with  the  end  of  the  war  the  price 
of  the  stock  began  to  rise  by  leaps  and  bounds. 
The  public  demand  was  met  with  generous 
supplies.  In  1865  the  capital  was  increased 
from  4  to  10  million  dollars,  and  the  price 


WALL  STREET  125 

was  240.  Next  year,  when  the  capital  was 
doubled  and  the  price  180,  the  trustees  of  the 
pool  held  130,000  shares.  Soon  afterwards 
L.  W.  Jerome,  then  a  giant  of  the  Stock 
Exchange,  bought  100,000  shares  from  the 
trustees  of  the  pool  at  20  per  cent,  below  the 
market  price,  and  began  to  unload  artfully 
but  slowly.  Unfortunately  for  him  the  winter 
brought  currency  troubles  and  a  severe  de- 
pression. The  market  was  deluged  with 
stock,  and  in  a  few  days  Pacific  Mail  fell  from 
163  to  115.  In  later  years  the  watered  stock 
of  this  steamship  company  sank  to  10;  but 
the  fall  to  115  pretty  nearly  ruined  Jerome, 
who  was  only  saved  from  extinction  by  the 
charity  of  the  pool,  which  released  him  from 
part  of  his  contract.  "The  same  blow,"  we 
are  told,  "which  felled  this  financial  giant 
also  struck  hard  upon  our  bucolic  pigmy." 
Dazzled  by  the  fortunes  won  in  Pacific  Mail, 
he  had  bought  400  shares  at  175,  putting  up 
a  margin  of  no  less  than  60  per  cent.,  "a  dead 
open  and  shut  thing"  as  he  expressed  it, 
certainly  a  judicious  and  ample  margin  in 
ordinary  cases.  But  in  thirty  days  this 
margin  was  wiped  out.  He  sold  his  four 
hundred  shares  at  the  lowest  panic  price, 
losing  $24,000.  For  a  month  the  agriculturist 


1S6          THE  STOCK  EXCHANGE 

retired  to  the  backwoods  with  a  poor  remain- 
der of  $5,000.  But  he  returned,  and  by  a 
series  of  lucky  turns,  raised  it  in  eight  months 
to  $13,000.  Then  he  ran  across  his  Pacific 
Mail  adviser,  who  gave  him  another  inside 
tip  about  Atlantic  Mail.  Unwarned  by  his 
experience  with  its  Pacific  sister,  he  listened 
to  the  story  of  its  wonderful  promise.  It  had 
fallen  20  per  cent,  and  must  recover.  So  he 
bought  100  shares  at  93,  depositing  a  10  per 
cent,  margin.  That  very  day  Atlantic  Mail 
began  to  drop.  It  hung  for  a  while  at  87,  and 
then  broke  64  per  cent,  in  an  hour.  Again 
our  poor  friend  sold  at  the  lowest  point,  23. 
It  usually  happens  so.  After  this  calamity 
he  retired  finally  from  Wall  Street  with  $2,500 
in  his  wallet,  just  $200  more  than  he  had 
brought  with  him  originally.  His  first,  best 
broker  asks  why  he  did  not  retire  with  his 
$30,000  safely  invested,  and  replies  — 

"Operators  come  into  the  street  with  the 
intention  of  making  5  or  10  or  20,000  dollars, 
which  having  been  done,  they  say  they  will 
draw  out  their  profits  and  retire.  But  they 
don't.  Their  broker  blandly  hovers  over  and 
guards  their  precious  little  piles  for  himself. 
He  inquires  in  an  insinuating  voice,  just  as 
he  is  going  to  the  Board,  whether  his  cus- 


WALL  STREET  127 

tomer  'has  anything  to  say.'  The  customer 
generally  has  something  to  say  in  the  shape 
of  an  order  to  buy  or  sell,  and  then  in  five 
minutes,  or  thereabouts,  he  finds  his  pile  is 
locked  fast  as  a  margin  in  the  fond  embrace 
of  his  broker,  who  sits  over  it  and  feeds  upon 
it  till  what  with  interest,  commissions,  turns, 
losses,  etc.,  the  precious  little  pile  dwindles, 
and  finally  disappears." 

It  hardly  ne*eds  argument  to  prove  that  the 
odds  are  heavily  against  the  amateur  specu- 
lator. If  he  is  not  actually  fleeced  and 
swindled  he  is  far  more  likely  than  not  to 
lose.  It  is  like  betting  against  the  bank. 
The  wear  and  tear  of  commissions  and  stamps 
and  interest  eats  away  his  capital,  even  if 
the  luck  is  evenly  balanced.  As  an  example 
of  the  means  by  which  the  small  fry  find 
their  way  into  the  mouth  of  the  great  pike 
operators  a  very  old  story  may  be  revived. 
Jay  Gould — or  some  such  person — on  one 
occasion  being  asked  for  advice  by  the  pastor 
of  a  rich  and  fashionable  New  York  Taber- 
nacle, whispered  a  recommendation  of  Pacific 
Mail  and  promised  to  reimburse  the  pious 
man  if  his  purchases  of  that  stock  should 
result  in  loss.  When  the  pastor  came  to  him 
later,  deeply  distressed  by  a  heavy  personal 


128          THE  STOCK  EXCHANGE 

loss,  Gould  was  as  good  as  his  word,  and 
promptly  handed  him  a  cheque  for  the 
amount.  " But  how  about  my  parishioners? " 
inquired  the  reverend  gentleman.  "You 
placed  no  ban  of  secrecy  upon  me,  and  their 
losses  are  enormous."  To  which  Gould  re- 
plied calmly,  "They  were  the  people  I  was 
after."  Thus  was  verified  a  Japanese  prov- 
erb: "The  darkest  place  is  just  below  the 
candlestick." 

Mr.  Thomas  Gibson,  in  a  recent  analysis 
of  the  art  of  speculation,  has  described  the 
results  of  a  careful  examination  of  4,000 
speculative  accounts  spread  over  a  period  of 
ten  years.  Four  points  were  established. 

1.  Most  of  the  operations  were  pure  gam- 

bling. 

2.  Success  almost  invariably  led  to  excess 

and  disaster. 

3.  There  was  a  marked  tendency  to  buy  at 

the  top  and  sell  at  the  bottom. 

4.  About  80  per   cent,   of  the  accounts 

showed  a  final  loss. 

Thus,  apart  from  all  the  worry,  work,  and 
anxiety,  four-fifths  of  these  eager  fortune 
hunters  actually  lost  money  as  well  as  time. 
In  another  case  500  speculative  accounts  in 
Steel  Common  taken  from  the  books  of  differ- 


WALL  STREET  129 

ent  firms  between  July  1901  and  March  1903 
(in  both  of  which  months  the  stock  sold  at 
37)  gave  the  following  results:  In  343  cases 
the  accounts  terminated  in  loss;  88  showed  a 
profit;  52  fairly  balanced;  and  in  17  cases  the 
Steel  Stocks  were  taken  up  by  the  purchasers 
to  be  held  "in  all  cases  at  a  considerable 
paper  loss."  So  wide  of  the  mark  is  the 
popular  fancy  that  stock  market  speculation 
on  borrowed  money  is  a  hopeful  enterprise. 
It  is  a  curious  fact  that  comparatively  few, 
even  among  professional  operators,  are  to  be 
found  often  on  the  bear  side.  I  have  met 
hardened  speculators  who  boasted  that  they 
never  had  done,  and  never  would  do  anything 
so  immoral  as  to  try  to  make  money  in  this 
way  "out  of  other  men's  losses"  by  the  fall  of  ; 
a' stock.  But  a  very  little  reflection  will  show 
that  no  code  of  ethics  can  make  a  valid  dis- 
tinction between  betting  that  a  horse  will  win 
and  betting  that  it  will  lose.  It  may  be  wrong 
to  buy  beyond  your  purse  when  things  look 
cheap,  or  to  sell  more  than  you  possess  when 
they  look  dear.  But  there  is  exactly  the  same 
moral  objection  to  either  course,  and  of  course 
there  is  nothing  like  a  bear  contingent  to 
steady  and  check  a  falling  market.  The 
speculator  for  a  rise  who  is  trying  to  sell  in  a 


130          THE  STOCK  EXCHANGE 

falling  market  has  every  reason  to  be  grateful 
to  the  speculator  for  a  fall  who  has  sold 
"short,"  and  is  therefore  forced  to  buy  stock 
in  order  to  meet  his  obligations.  Theoreti- 
cally a  successful  operator  should  be  capable 
of  bearish  and  bullish  moods,  for,  on  the 
whole,  over  a  period  of  years  stocks  and 
shares  tend  to  maintain  their  level,  though 
great  changes  in  price  may  result  from  great 
wars,  which  destroy  vast  quantities  of  capital 
and  create  vast  quantities  of  Government 
debt,  or  from  long  periods  of  peace  when  capi- 
tal accumulates  and  interest  falls.  But  bear 
operations,  especially  on  a  large  scale,  are  very 
dangerous,  because  there  may  be  a  shortage  of 
available  stock,  and  in  that  case  holders  may 
squeeze  the  bear  to  any  extent  and  force  kim 
to  buy  back  at  ruinous  prices.  This  may  ac- 
count for  some  of  the  almost  superstitious 
objections  entertained  against  bear  opera- 
tions. A  shrewd  old  New  York  broker,  just 
before  retiring,  told  a  young  disciple,  "If  I 
had  to  live  my  life  over  again  I  would  always 
be  a  bull,  but  I  would  not  always  have  an 
interest."  In  other  words,  he  would  only 
speculate  in  a  rising  market.  At  other  times 
he  would  be  content  with  his  commissions. 
To  return  to  Wall  Street.  Since  the  end 


WALL  STREET  131 

of  the  Civil  War  it  has  seen  three  crises,  each  of 
which  may  be  said  to  have  marked  the  end 
of  a  distinctive  epoch  in  finance.  The  panic 
of  1873 — when  Jay  Cooke  came  to  grief  and 
the  New  York  Stock  Exchange  closed  for  ten 
days — stopped  the  construction  of  railways 
between  the  Great  Lakes  and  the  Pacific  coast 
—a  productive  work  which  found  peaceful 
occupation  for  the  million  disbanded  soldiers 
of  the  Civil  War,  and  had  so  solved  what 
seemed  the  almost  insoluble  problem  of  that 
vast  accession  of  idle  men  to  the  labour 
market.  After  five  years'  rest  and  recupera- 
tion another  era  of  speculative  expansion 
commenced  in  1878,  anticipating  the  resump- 
tion of  specie  payments,  and  lasted  with 
many  ups  and  downs  for  about  six  years, 
during  which  time  many  thousands  of  miles 
of  railway  were  built  parallel  to,  and  in  com- 
petition with,  some  of  the  most  prosperous 
existing  lines.  The  capital  embarked  in  these 
new  adventures  proved,  for  the  most  part, 
unfortunate  for  the  original  investors;  hence, 
after  the  panic  of  1884  brought  this  second 
era  of  prosperity  to  an  end,  there  followed  a 
period  of  transition  during  which  these  new 
and  at  first  unprofitable  lines  were  being 
absorbed  by  the  older  and  stronger  corpora- 


THE  STOCK   EXCHANGE 

tions.  Then  came  another  outburst  of  specu- 
lation, which  was  marked  by  the  entry  of 
large  foreign  operators  into  the  New  York 
market,  and  by  a  great  development  of  Lon- 
don's dealings  in  Americans,  or  "Yankees," 
as  they  were  called.  A  check  to  this  was 
administered  by  the  Baring  crisis.  But  the 
collapse  in  New  York  was  not  quite  due,  and 
was  postponed  till  1893;  its  proximate  cause 
being  the  vicious  silver  legislation  of  the 
United  States  Government.  A  heavy  cloud  of 
depression  hung  over  Wall  Street  until  1896, 
when  Mr.  McKinley  was  elected  President  on 
a  straight  gold  platform.  This  restored  the 
confidence  of  the  moneyed  interest,  and  laid 
the  train  for  a  new  era  of  speculative  activity. 
By  the  Dingley  tariff  the  profits  of  favoured 
manufacturers  were  enormously  increased  at 
the  expense  of  the  general  public,  and  upon 
the  passing  of  the  Tariff  there  followed  in 
logical  sequence  the  organisation  of  trusts 
to  stifle  competition  and  raise  prices  to  the 
utmost  limit  of  the  protective  and  prohibitive 
duties.  From  the  Wall  Street  point  of  view 
this  chapter  may  be  called  the  capitalising  of 
the  tariff.  It  lasted  till  the  Stock  Exchange 
and  banking  crisis  of  1907.  That  disastrous 
collapse  of  credit  started  with  the  run  on  the 


WALL  STREET  133 

Knickerbocker  Trust  in  October,  and  ended 
in  a  suspension  of  cash  payments  which  was 
continued  for  many  weeks  by  nearly  all  the 
banks  in  practically  all  parts  of  the  United 
States. 

This  crisis  and  its  consequences,  political, 
social  and  economic,  are  still  vivid  in  the 
memory.  But  though  the  crisis  stands  out 
clear  and  the  consequences  are  undeniable, 
a  lively  controversy  still  rages  about  its 
causes.  Perhaps  it  may  here  be  affirmed  that 
the  unhealthy  conditions  caused  by  tariff 
and  trusts  on  the  one  hand,  and  by  the  cur- 
rency and  banking  laws  on  the  other,  were 
largely  responsible  for  the  severity  of  the 
cataclysm;  for  the  storm,  after  blowing 
down  the  whole  fabric  of  credit,  left  behind 
it  not  only  a  long  and  deep  depression  in 
almost  every  branch  of  industry  but  a  wide- 
spread and  apparently  irresistible  popular 
resentment  against  the  Tariff. 

Each  of  the  crises  named  was  marked  by 
one  common  feature — a  suspension  of  pay- 
ment by  the  New  York  banks;  and  in  the 
case  of  all  except  the  last  the  funds  of  the 
Wall  Street  banks  were  mainly  employed  in 
loans  on  Stock  Exchange  collateral  for  the 
purpose  of  speculative  operations.  Indeed, 


134          THE  STOCK  EXCHANGE 

Wall  Street  and  the  Stock  Exchange  were 
till  the  late  nineties  practically  synonymous 
terms,  so  that  a  banking  crisis  would  naturally 
attend  any  really  severe  crisis  upon  the  Stock 
Exchange.  But  the  reason  why  the  Wall 
Street  banks  could  not  withstand  the  "runs" 
of  October.  1907  was  rather  different;  for  in 
the  era  of  great  trust  and  corporate  flotations 
after  1906  immense  sums  of  bank  money  had 
been  loaned  to  the  managers  under  "syndi- 
cate agreements."  This  money  had  been 
available  for  Stock  Exchange  operations;  but 
now  there  were  Stock  Exchange  loans  and 
syndicate  loans  in  Wall  Street,  and  the  latter 
proved  not  to  be  liquid  like  the  former.  When 
the  liquidation  of  Stock  Exchange  loans  was 
finished,  and  creditors  of  the  banks  were  still 
clamorous,  there  was  nothing  for  the  banks  to 
do  but  suspend  payment;  for  the  syndicate 
loans  were  found  to  be  quite  unwieldy  and 
uncollectable  in  such  an  emergency. 

The  fact  that  one  institution  in  New  York 
was  financing  81  syndicates  at  one  time,  will 
give  some  idea  of  the  extent  to  which  the  re- 
sources of  Wall  Street  were  used  outside  of 
the  Stock  Exchange  when  the  collapse  came 
in  1907.  Since  that  time  the  current  has 
changed  back  again  to  Stock  Exchange 


WALL  STREET  135 

operations,  and  now  there  is  direct  manipula- 
tion of  prices  of  securities  on  the  Stock  Ex- 
change by  groups  of  capitalists  who  had  for 
some  years  devoted  their  operations  almost 
entirely  to  the  creation  and  management  of 
syndicates. 

The  New  York  Stock  Exchange  business 
differs  radically  in  one  respect  from  all  others : 
its  dealings  are  practically  confined  to  home 
corporations.  Canadian  Pacific  Railway 
shares  are  dealt  in  sparingly,  and  there  is  a 
nominal  market  for  some  issues  of  Japanese 
bonds.  There  used  to  be  a  market  for  some 
Mexican  rails,  but  now  a  recorded  sale  rarely 
appears.  American  investments  have  always 
been  sufficiently  attractive  to  hold  the  bulk 
of  American  capital.  This  will  change  some 
day,  but  not  soon.  Some  day  American 
colonial  securities  will  probably  be  quoted 
and  actively  dealt  in.  There  is  a  steady  ab- 
sorption of  good  shares  by  small  investors. 
Every  year  the  registry  of  stock  holders 
shows  an  increase  in  numbers  in  most  of  the 
old-established  dividend-paying  corpora- 
tions. Hence  comes  the  demand  for  more 
public  control  of  corporations  and  more 
protection  for  investors.  The  business  of 
the  New  York  Stock  Exchange  will  be- 


13(5          THE  STOCK  EXCHANGE 

come  more  of  an  investment  character,  as 
American  securities  develop  into  sure  revenue 
producers.  Railway  shares  that  used  to  be 
of  doubtful  value  have  become  sound  invest- 
ments, and  there  are  comparatively  few  low- 
priced  shares  now  available  for  the  shrewd 
investor  who  likes  to  buy  shares  that  may 
ultimately  become  revenue  producing.  Such 
buyers,  if  they  still  fancy  American  securi- 
ties, must  eventually  turn  to  the  ordinary 
shares  of  industrial  corporations,  of  which 
there  will  be  a  large  assortment  from  which 
to  choose;  but  the  market  for  them  will  not 
be  so  broad  and  speculatively  attractive  as 
it  has  been  for  the  ordinary  shares  of  railway 
corporations.  It  may  always  be  possible  to 
buy  but  not  always  possible  to  sell.  The 
tendency  of  public  opinion  is  to  force  the 
New  York  Stock  Exchange  to  protect  the  in- 
terests of  dealers  in  its  securities  with  the 
utmost  possible  care. 


CHAPTER  V 

GOOD    SECURITIES   AND    THE   ART    OP 

INVESTMENT 

AFTER  our  survey  of  Stock  Exchanges  in 
the  past  and  the  present  my  readers  will  be 
prepared  for  some  critical  examination  of 
the  area  and  modes  of  investment.  The 
difference  between  investment  and  specula- 
tion cannot  be  defined  accurately;  but  every 
one  has  a  rough  idea  of  a  line  which  divides 
safety,  with  the  certainty  of  a  reasonable 
interest,  from  risk,  with  all  its  possibilities 
of  loss  or  profit.  The  theme  of  speculation! 
will  be  developed  in  our  next  chapter.  Our 
present  object  is  to  direct  the  attention  of 
the  genuine  investor,  who  wants  his  interest  \ 
to  be  as  high  as  is  compatible  with  the  safety 
of  his  principal,  to  some  of  the  general  rules 
and  considerations  that  should  limit  and 
guide  his  choice. 

The  largest  and  most  varied  list  of  securi- 
ties in  the  world  is  the  "Daily  Official  List" 
137 


138          THE  STOCK  EXCHANGE 

of  the  London  Stock  Exchange.  It  now  con- 
sists of  sixteen  large  pages.  The  price  of 
a  single  copy  is  sixpence.  It  is  published  by 
the  Trustees  and  Managers  of  the  Stock 
Exchange,  under  the  authority  of  the  Com- 
mittee, at  4,  Copthall  Buildings,  London, 
E.G.  Largely  as  the  result  of  the  ever- 
increasing  tendency  both  at  home  and  abroad 
^o  give  commercial  and  industrial  under- 
takings the  form  of  joint-stock  companies, 
the  London  list  has  expanded  very  rapidly  in 
the  last  half -century.  Up  to  the,  year  1867 
one  page  sufficed,  then  four  till  1889,  then 
eight  till  1900,  and  twelve  from  1900  to  1902, 
when  it  reached  its  present  limit  of  sixteen. 
In  the  last  twenty -five  years  the  total  nominal 
value  of  all  the  securities  quoted  has  nearly 
doubled— from  £5,480,000,000  in  1885  to 
£10,200,000,000  in  1909,  about  twice  the 
nominal  capital  value  of  the  securities  quoted 
on  the  Paris  Bourse  according  to  the  latest 
statement  that  I  have  seen.  In  1902  the  total 
par  value  of  the  listed  and  unlisted  securities 
dealt  in  on  the  New  York  Stock  Exchange 
was  only  about  £3,000,000,000. 

The  London  Stock  Exchange  List  is  sub- 
divided into  thirty-eight  different  classes  of 
,very  varying  importance.  The  Foreign 


GOOD  SECURITIES  139 

market,  including  the  loans  of  foreign  gov- 
ernments and  foreign  provincial  and  muni- 
cipal issues,  deals  with  a  nominal  capital  of 
over  three  thousand  million  pounds  sterling. 
Other  great  groups  are— 
The  Consol  market,  includ- 
ing colonial  and  municipal 

issues 1737  millions- 

The  Home  railway  market    .     1220 
American    railroads,    includ- 
ing U.  S.  steel 1803 

Foreign  railway  market    .    .       571 
Colonial       "  .    .       229        " 

Indian  .    .       145 

Then  there  are  the  immense  markets  of 
home  banking,  insurance,  shipping,  gas, 
waterworks,  canals,  mining,  industrial,  finan- 
cial and  miscellaneous,  comprising  about 
£1,500,000,000  of  nominal  values.  The  mis- 
cellaneous market  includes  a  great  number 
of  British  companies  working  abroad  or  in 
the  colonies,  or  partially  at  home  and  par- 
tially abroad,  such  as  land,  mining,  rubber, 
nitrate,  telegraphs,  etc.  In  the  foreign  bond 
market  only  a  fraction  of  the  capital  invested 
is  British.  In  American  railways,  British 
capital  comes  easily  next  after  American. 
In  all  the  other  markets  of  the  London 


140          THE  STOCK  EXCHANGE 

Stock  Exchange  home  investors  own  the 
whole,  or  a  greatly  preponderating  share. 
Before  leaving  the  list  we  shall  do  well  to 
insist  again,  at  the  risk  of  repetition,  that  it 
is  not  always  possible  to  buy  or  sell  at  the 
prices  quoted.  A  jobber  cannot  be  forced 
to  deal.  The  real  test  of  saleability  is  the 
column  showing  "business  done,"  which 
indicates  clearly  enough  what  are  the  active 
securities.  Among  inactive  securities  there 
are  many  (such  as  small  but  sound  State 
and  municipal  loans)  which  are  saleable 
enough.  On  the  other  hand,  small  specula- 
tive securities  such  as  rubber  and  oil  com- 
panies, and  many  other  commercial  and  in- 
dustrial ventures,  are  easily  got  rid  of 
when  for  some  reason  or  other  speculation 
flourishes,  but  are  at  other  times  almost  un- 
marketable. The  best  markets  for  local 
industrials  are  often  found  on  provincial 
Stock  Exchanges,  such  as  Glasgow,  Man- 
chester, or  Liverpool. 

For  investment  purposes  securities  may  be 
divided  into  public  and  private,  the  former 
being  based  on  public  credit  backed  by  taxes 
(or  rates),  and  the  latter  on  private  credit 
backed  by  profits,  good  will,  and  tangible 
assets. 


GOOD  SECURITIES  141 

The  best  Government  loans,  starting  with 
British  Consols  and  French  Rentes,  and  end- 
ing with  the  Imperial  and  State  loans  of 
Germany,  yielded  at  the  close  of  1910  from 
3  to  4  per  cent,  interest.  Twelve  years  ago 
they  yielded  from  2f  to  3j  per  cent.  The 
change  has  come  about  mainly  through 
enormous  borrowings  for  wars  and  increased 
armaments.  If,  as  seems  now  happily  not  im- 
probable, we  may  look  forward  to  a  period  of 
abstention  from  war,  with  limitations  of  mili- 
tary and  naval  expenditure  by  arrangement 
among  the  Powers,  a  substantial  appreciation 
in  the  credit  of  these  gilt-edged  securities 
(especially  British  and  German)  can  confi- 
dently be  predicted,  though  it  may  be  long 
before  we  return  to  the  levels  of  1897  and 
1898.  With  the  increasing  demands  for  public 
improvements  of  all  kinds,  the  output  of 
municipal  loans  throughout  the  world  is  a 
formidable  competitor  with  the  borrowing 
propensities  of  national  governments.  For- 
tunately, the  good  municipal  loans  are  gener- 
ally well  spent  for  purposes  which  are  directly 
or  indirectly  profitable.  The  investor  is  also 
protected,  as  a  rule,  either  by  a  sinking  fund, 
or  by  a  provision  for  repayment  at  par  on 
a  given  date,  or  by  a  statutory  limitation 


142          THE  STOCK  EXCHANGE 

of  the  total  indebtedness  in  accordance  with 
the  assessable  value  of  the  town,  or  by  more 
than  one  of  these  methods  in  combination. 
No  British  municipality  has  ever,  since  the 
Municipal  Corporations  Act  of  1835,  failed 
to  pay  its  interest  punctually.  Among  the 
States  of  the  American  Union  there  were 
some  scandalous  repudiations  in  the  days  of 
Sidney  Smith,  which  have  been  immortal- 
ised by  the  stinging  pen  of  that  wittiest  of 
economic  and  political  writers.  However, 
with  a  mere  handful  of  exceptions  the  record 
of  North  American  and  colonial  towns  has 
been  clean  for  a  generation,  and  their  credit 
is  deservedly  high.  But  as  the  coupons  upon 
the  city  bonds  of  the  United  States  are  not 
payable  in  London,  they  are  of  little  interest 
to  English  investors.  Some  care  should  be 
exercised  in  regard  to  the  size  of  towns;  for 
small  colonial  villages,  which  might  almost  be 
wheeled  out  of  the  municipal  area  in  a  single 
night,  sometimes  call  themselves  "cities," 
and  get  their  bonds  hawked  about  in  London. 
The  investor  should  wait  for  a  good  pro- 
spectus or  take  the  issue  of  a  decent-sized 
colonial  town  which  is  duly  quoted  in  the 
London  Stock  Exchange  list.  But  he  may 
well  be  satisfied  with  a  slightly  lower  rate  of 


GOOD  SECURITIES  143 

interest  in  home  municipal  stocks,  from 
which,  if  he  is  an  "inscribed"  holder,  he  will 
receive  his  interest  regularly  without  trouble. 
All  the  larger  issues  are  readily  marketable  at 
any  moment,  though  of  course  the  jobber's 
turn  is  rather  bigger  than  in  the  case  of 
consols. 

To  judge  the  value  of  second-class  public 
securities  requires  a  rather  wide  knowledge 
of  political  and  financial  conditions.  A  rough 
criterion  is  the  market's  own  appreciation. 
But  the  market  seldom  discriminates  ade- 
quately between  loans  for  war  or  armaments 
and  loans  for  capital  and  reproductive  pur- 
poses. The  value  of  its  judgment  is  rather 
technical  as  between  different  securities  of 
the  same  class.  But  a  nation  groaning 
under  a  dead-weight  debt  contracted  for  war 
is  in  a  very  much  inferior  position  to  that  of 
a  country  like  Canada  which  has  borrowed 
mainly  for  reproductive  purposes.  And  in 
the  same  country  there  may  be  many  public 
issues  of  very  varying  merit.  Thus  a  close 
study  of  the  various  Greek  bonds  will  show 
why  the  railway  loan  is  considered  the  best, 
and  so  yields  the  lowest  rate  of  interest. 
Similar  distinctions  may  be  made  in  the  case 
of  Turkish,  Argentine,  Chinese,  and  Bra- 


144          THE  STOCK  EXCHANGE 

zilian  loans.  As  a  rule,  in  the  case  of  coun- 
tries which  are  financially  weak  and  over- 
burdened with  debt,  the  market  prefers 
loans  specially  mortgaged  on  some  branch 
of  the  customs  or  inland  revenue.  In  coun- 
tries with  rising  credit  the  lower  interest 
loans  standing  well  below  par  are  the  most 
attractive.  A  railway  bond  guaranteed  by 
the  Government  has  a  double  security,  and 
may  in  some  cases  be  preferred  to  a  direct 
Government  issue.  Indeed,  the  unguaranteed 
bonds  of  the  best  British  railway  companies 
in  South  America  often  yield  a  lower  rate  of 
interest  than  those  of  the  Government  whose 
territory  they  serve.  Generally  speaking, 
investors,  who  do  not  wish  to  lose  their 
capital,  should  avoid  the  municipal,  and 
provincial  issues  of  South  America,  and  all 
Central  American  loans,  and  all  the  loans  of 
Venezuela,  Colombia  and  other  minor  re- 
publics of  South  America.  To  judge  by  ex- 
perience and  present  conditions,  Argentina, 
Chile,  and  Brazil  are  the  most  secure  of  South 
American  States.  But  even  in  these,  as  well 
as  in  Mexico,  there  are  elements  of  political 
danger  and  social  disorder  which  cannot  be 
overlooked. 

Turning  from  public  to  private  securities, 


GOOD  SECURITIES  145 

we  are  faced  by  an  entirely  new  set  of  con- 
siderations, and  the  task  of  the  investor  is 
far  more  difficult  and  complicated.  By  a 
skilful  and  cautious  use  of  local  knowledge 
a  careful  buyer  may  often  secure  for  himself 
a  high  rate  of  interest  with  comparatively 
little  risk.  But  even  so  he  will  be  well  advised 
not  to  entrust  all  his  eggs  to  a  local  basket. 
In  case  of  the  accidents  and  misfortunes 
due  to  unforeseen  frauds,  or  unsuspected 
mismanagement,  or  fashion,  or  competition, 
any  local  concern  may  come  to  grief.  A  town 
or  part  of  a  town  may  decay,  an  industry 
may  decline,  the  values  and  rents  of  lands, 
houses,  factories,  and  shops,  may  shrink  and 
dwindle  to  the  most  alarming  extent.  Cer- 
tainly those  who  have  capital  should  take 
care  that  a  good  part  of  it  is  distributed 
among  unassailable  securities  of  a  national 
or  international  character. 

Let  us  now  pass  to  the  technicalities  of 
joint-stock  companies — their  bonds,  their  pre 
ference  stocks,  and  their  ordinary  shares,  and 
to  the  general  merits  of  the  security  which 
various  species  of  undertakings  offer. 

During  the  last  seventy  or  eighty  years 
railway  enterprise  has  probably  proved  the 
most  productive  and  profitable  of  all  invest- 


146  THE  STOCK  EXCHANGE 

ments.  The  early  promotions  of  course  con- 
tained a  large  sprinkling  of  swindles.  The 
early  railroad  pioneers  were  often  of  the 
buccaneering  type — a  type  not  yet  extinct 
in  new  countries.  But  in  the  average  case 
where  the  promoters  have  attained  an  average 
standard  of  honesty,  and  the  engineers  an 
average  standard  of  skill,  the  faith  of  the 
investor  has  been  justified.  So  far  no  in- 
vention for  land  transport  has  appeared 
which  seems  at  all  likely  to  vie  with  the  steel 
car,  drawn  by  steam  or  electricity  along  steel 
rails,  in  cheapness  and  celerity.  It  might 
seem  that  steamships  should  provide  equally 
attractive  openings  to  the  investor.  But 
here  a  vital  difference  emerges.  Almost 
every  railway  enjoys  at  least  a  partial  mono- 
poly. It  has  a  route  fixed  and  permanent, 
which  no  competitor  can  use  without  its 
consent.  The  people  along  the  route  must 
use  it  for  travelling  or  freight,  and  it  is  only 
in  densely  populated  countries  that  an  alter- 
native line  is  often  available  without  great 
loss  of  time  and  convenience.  But  the  sea  is 
a  public  highway  open  to  all.  No  shipping 
company  can  exclude  a  competitor  from  its 
route.  And  as  soon  as  a  lucrative  monopoly 
begins  to  be  enjoyed,  another  company,  or  a 


GOOD  SECURITIES  147 

swarm  of  tramps,  is  almost  certain  to  appear. 
Tramways  and  improved  roads,  with  bicycles 
and  motor  cars,  have  no  doubt  reduced 
short  distance  passenger  traffic  in  some  places, 
but  they  also  act  as  feeders  to  a  trunk  line. 
There  may  be  a  future  danger  to  railroad 
investors  in  aeroplanes  and  flying  machines; 
but  at  present  the  peril  seems  to  attach  to 
the  persons  rather  than  to  the  competitors  of 
aeronauts.  Telegraph  companies  are  threat- 
ened by  telephones  and  marconigrams,  but 
so  far  they  seem  likely  to  survive.  The  tele- 
phone is  a  quick  substitute  for  the  personal 
interview.  The  telegram  is  a  quick  sub- 
stitute for  the  letter.  Each  has  its  special 
use,  and  therefore  the  capital  invested  in 
each  may  continue  to  yield  interest.  So, 
again,  many  substitutes  have  been  invented 
for  rubber;  but  none  of  them  has  yet  proved 
at  all  formidable. 

It  would  be  possible  to  fill  many  pages 
in  this  way  discussing  the  probable  future  of 
the  different  branches  of  commerce  and 
industry  into  which  capital  is  being  and  has 
been  poured  by  investors.  But  our  special 
purpose  here  is  to  define  broadly  what  is 
a  satisfactory  security,  leaving  the  investor 
to  speculate  upon  and  allow  for  the  possi- 


148          THE  STOCK  EXCHANGE 

bility  of  any  particular  business  being  super- 
seded by  the  invention  of  a  superior  process 
or  a  cheaper  substitute.  And  here  it  may  be 
well  to  begin  by  accepting,  with  limitations, 
the  received  opinion  that,  in  the  sphere  of 
private  or  commercial  as  distinguished  from 
government  and  public  stocks,  the  best 
security  is  a  first  mortgage  upon  any  flourish- 
ing enterprise  which  can  offer  ample  assets. 
It  is  not  every  undertaking  that  can  provide 
satisfactory  security  for  the  issue  of  bonds. 
In  fact,  it  may  almost  be  said  that  a  real 
freehold  estate,  with  a  market  value  consid- 
erably above  the  total  issue  of  first  mortgage 
bonds,  is  the  only  case  in  which  a  first  mort- 
gage in  itself  offers  anything  like  an  impreg- 
nable security  even  in  a  stable  and  civilised 
country.  For  this  purpose,  pastoral  or  agri- 
cultural land  is  superior  to  urban  values,  as 
it  is  generally  subject  to  less  violent  fluctua- 
tions. But  even  here  there  is  the  possibility 
of  a  confiscatory  land  tax — and  that  passed 
by  the  Labour  Government  in  Australia  in 
1910  almost  deserves  the  epithet — which  will 
make  a  heavy  reduction  in  the  selling  value 
of  the  lands  of  a  pastoral  company,  and  so 
endanger  the  capital  even  of  those  who  hold 
first  mortgage  bonds  on  the  property.  The 


GOOD  SECURITIES  149 

value  of  a  first  mortgage  rests  on  the  fact 
that  if  the  interest  is  not  paid  the  mortgagees 
can  immediately  seize  and  sell  the  property. 
Where  the  property  consists  of  real  estate, 
timber,  or  other  valuable  and  marketable 
goods  in  ample  amount,  and  the  courts  of 
justice  can  be  relied  on,  the  security  may 
be  called  perfect.  But  in  nine  cases  out  of 
ten  the  property  of  the  corporation  or  com- 
pany owes  most  of  its  value  to  the  under- 
taking as  a  whole.  As  Mr.  E.  S.  Meade 
puts  it,  in  his  excellent  treatise  on  Corpora- 
tion Finance,  "When  the  property  of  the 
company  is  specialised  to  the  use  of  a  particu- 
lar business,  such  as  a  railroad  or  manufactur- 
ing plant,  where  the  business  must  be  carried 
on  in  a  certain  place  and  by  people  who  are 
skilled  in  its  management,  and  where  the 
property,  once  devoted  to  a  particular  use, 
can  be  turned  to  no  other  use,  the  real 
security  of  the  creditor  is  not  the  property 
but  the  earnings  of  the  property."  On 
this  view  the  much-vaunted  first  mortgage 
on  a  railroad  owes  its  value  to  the  fact  not 
that  it  enables  you  to  sell  the  property,  but 
that  it  is  a  first  charge  on  the  earnings.  In 
other  words,  the  American  first  mortgage 
bond  is  no  better  than  the  floating  charge 


150          THE  STOCK  EXCHANGE 

of  an  ordinary  English  debenture,  ^nd  if 
the  surplus  earnings  in  bad  times  are  less  it 
is  really  less  valuable.  Other  things  being 
equal,  a  well-covered  first  preference  is  almost 
as  good  as  an  equally  well-covered  bond  or 
debenture.  Let  us  put  the  American  first 
mortgage  bond  to  the  practical  test  of 
bankruptcy. 

If  we  look  at  the  actual  wording  of  the 
1897  mortgage  securing  "the  first  lien  con- 
vertible four  per  cent,  gold  bonds"  of  the 
Union  Pacific  Railroad  Company  (a  typically 
gilt-edged  investment  though  the  line  was  in 
a  receiver's  hands  twenty  years  ago)  we  find 
that  it  assigns  to  the  trustee  all  the  several 
lines  of  railroad;  property,  terminals,  prem- 
ises, etc.,  belonging  to  the  railroad  company. 
Under  this  and  other  mortgage  deeds  the 
trustee  for  the  bondholders  has  large  and 
sweeping  powers  over  the  property  of  the 
corporation  in  the  event  of  bankruptcy. 
He  can,  in  theory,  sell  the  property,  or  enter 
upon  it  and  operate  it,  applying  the  proceeds 
or  revenues  to  the  liquidation  of  its  debts. 
In  theory,  I  say,  and  according  to  the  letter 
of  the  law,  the  property  of  a  corporation 
which  fails  to  pay  interest  on  its  bonds,  or 
to  meet  them  when  due,  is  to  be  seized  by 


GOOD  SECURITIES  151 

the  trustee  and  sold.  It  is  for  this  that  the 
mortgage  deed  was  drawn,  for  this  that  the 
trustee  exists.  A  similar  procedure  is  actually 
carried  out  in  small  bankruptcies.  But  in 
large  affairs  the  American  law  does  not 
work.  Just  as,  in  a  panic,  American  banks 
are  allowed  to  suspend  cash  payments  with- 
out closing  their  doors,  so  (to  quote  our 
previous  authority)  "the  theory  of  the  cor- 
poration mortgage  cannot  in  many  cases 
be  carried  out." 

How,  then,  is  the  mortgage  made  null  and 
void,  and  "the  property  protected  against 
its  creditors"?  It  is  done  "by  invoking  the 
aid  of  a  court  of  equity."  A  receivership 
is  the  easy  and  comfortable  haven  into  which 
in  troublous  times  an  American  corporation 
steers.  I  am  not  exaggerating.  Mr.  Meade, 
who  has  studied  the  law  and  the  facts  ex- 
haustively, declares  that  "at  the  first  threat 
of  disaster"  the  directors,  "who  see  long 
before  any  creditor  the  impending  insolvency 
of  the  company,  fly  to  the  shelter  of  a  court 
of  equity."  Equity  shields  them  from  the 
law,  and  bars  the  best  secured  creditors 
from  their  legal  remedy.  The  judge  usually 
appoints  the  chief  lawyer  of  the  bankrupt 
corporation,  or  possibly  even  its  president, 


THE  STOCK  EXCHANGE 

as  receiver.  Or  he  may,  and  often  does  in 
smaller  cases,  appoint  some  unsuccessful 
lawyer  connected  with  the  court;  for  a 
receivership  is  a  paid  office,  and  receiver- 
ships, especially  in  bad  times,  are  large 
fountains  of  patronage.  The  plea,  we  are 
told,  which  usually  prevails  with  the  judge 
on  these  occasions,  is  that,  unless  the  court 
intervenes  and  appoints  a  receiver,  the 
creditors  of  the  company  will  seize  upon  its 
property.  But  exactly  the  same  plea  could 
be  urged  in  respect  of  a  house-owner  who 
failed  to  pay  interest  on  his  mortgage.  The 
only  difference  is  that  in  the  case  of  a  cor- 
poration the  stockholders,  who  own  it,  are 
a  numerous  body.  . 

To  get  the  money  or  substitute  for  money 
that  he  needs  to  carry  on  the  business,  the 
receiver  usually  resorts  to  what  are  called 
"receiver's  certificates."  A  receiver's  certifi- 
cate is  "a  short  term  note  secured  by  a  first 
mortgage  upon  all  the  property  in  the  re- 
ceiver's hands."  The  plight  of  the  first 
mortgage  bondholder  may  now  be  imagined. 
He  has  not  only  lost  his  legal  remedy  for 
recovering  his  principal,  but  an  equitable 
first  mortgage  has  been  put  in  front  of  his 
legal  first  mortgage.  When,  therefore,  the 
first  mortgage  bond  of  American  law  is  put 


GOOD  SECURITIES  153 

to  the  sole  test  for  which  it  was  intended, 
it  only  too  frequently  proves  to  be  not  worth 
the  paper  it  was  written  upon.  In  course  of 
time,  no  doubt,  the  interest  on  the  bond  may 
be  resumed,  and  its  value  may  be  restored. 
But  it  is  not  in  practice  the  security  which  it 
professes  to  be  in  theory.  Equity  has  taken 
away  what  the  law  gave.  Looking  back 
over  thirty  years,  the  ordinary  stockholder 
in  a  sound  and  well-conducted  company  like 
the  Pennsylvania  has  been  better  off  for 
dividends,  and  better  secured  as  to  principal, 
than  the  owner  of  the  highly-valued  first 
mortgage  gold  bonds  of  many  American 
railroad  corporations. 

The  prestige  of  the  American  first  mortgage 
bond  is  so  great  and  so  undeserved,  and  its 
superiority  to  the  ordinary  English  debenture 
so  frequently  asserted,  that  I  shall  borrow 
from  Mr.  Meade  a  concrete  illustration  of  the 
risks  a  receiver  is  allowed  to  run.  First  of 
all,  however,  it  may  be  asked  whether  the 
bondholders  take  the  receivership  and  the 
receiver's  certificates  lying  down?  Appar- 
ently not,  but  they  spend  their  money  vainly 
in  equitable  suits. 

"Existing  creditors  of  the  company  are 
violently  opposed  to  the  issue  of  receiver's 
certificates  of  large  amount,  and  often  appeal 


154          THE  STOCK  EXCHANGE 

to  the  court  not  to  allow  the  receiver  to  place 
this  new  incumbrance  ahead  of  the  lien  on 
their  security.  Their  pleas  are,  however, 
usually  disregarded.  The  court  usually 
stands  by  its  own  appointee,  the  receiver,  and 
is  usually  guided  as  to  the  necessity  of  the 
issue  of  certificates  by  the  receiver's  recom- 
mendations. The  amount  of  money  which 
the  receiver  will  spend  upon  the  property 
depends  on  his  conception  of  his  duties." 

So  much  for  the  practice  as  stated  by  a 
friendly  writer.  Now  for  the  illustration. 
In  1896  the  Baltimore  and  Ohio  went  into  a 
receivership.  Two  receivers  were  appointed. 
The  road  was  in  a  bad  way.  What  was  to 
be  done?  The  proper  thing,  I  submit,  would 
have  been  for  the  receivers,  acting  as  trustees 
for  the  bondholders,  to  endeavour  first  of  all 
to  sell  the  line  on  favourable  terms  to  some 
stronger  neighbour  and  competitor  like  the 
Pennsylvania  or  the  Chesapeake.  But  the 
receivers  were  ambitious  and  clever.  They 
saw  a  chance  of  making  a  reputation  and 
took  it.  They  issued  receiver's  certificates 
and  car-trust  certificates  as  freely  as  if  they 
were  in  charge  of  the  purse  of  Fortunatus. 
They  spent  enormous  sums  on  reconstruc- 
tion and  equipment.  Mr.  Meade  writes:— 

"Earnings  were  heavily  drawn  upon,  and 


GOOD  SECURITIES  155 

in  many  instances  bondholders  were  forced 
to  wait  until  the  property  on  which  they 
had  a  lien  was  put  into  condition  to  earn  the 
interest.  .  .  .  This  work  was  not  carried 
through  without  severe  opposition.  Suit 
after  suit  was  brought  by  security-holders 
to  restrain  the  receivers  from  increasing  the 
burdens  of  the  property.  It  was  urged  that 
they  were  destroying  the  value  of  the  first 
mortgage  bonds  by  their  reckless  issue  of 
certificates.  .  .  .  Their  policy  was  denounced 
as  a  gross  usurpation  of  power." 

The  policy,  we  are  told,  was  abundantly 
justified  by  success.  The  efficiency  and  earn- 
ing power  of  the  road  was  improved.  But 
mark  the  writer's  summing  up.  "The  Balti- 
more and  Ohio  receivers  took  great  risks. 
They  applied  a  desperate  remedy  to  a  des- 
perate situation.  Their  success  on  this  ac- 
count was  all  the  more  conspicuous  and  bril- 
liant." Running  great  risks!  That  is  all 
very  well  for  ordinary  shareholders,  who  put 
their  money  into  speculative  securities  know- 
ing that  they  stand  to  win  or  lose  much. 
But  bondholders  do  not  lend  their  money 
on  those  terms.  They  accept  a  small  rate  of 
interest  in  return  for  a  guarantee  that  their 
principal  is  safe,  and  that  if  the  interest 
fails,  the  principal  can  be  promptly  regained 


156          THE  STOCK  EXCHANGE 

by  process  of  law.  They  stood  to  gain  noth- 
ing except  their  principal  by  the  desperate 
and  brilliant  risks  run  at  their  expense  by 
the  receivers.  They  naturally  and  rightly 
objected.  Many  of  them  probably  sold  their 
bonds  at  a  heavy  depreciation.  It  is  no 
answer  to  say  that  it  all  turned  out  well  in 
the  end  and  that  it  was  good  business  for  the 
stockholders.  The  affair  reflects  credit,  no 
doubt,  on  the  managing  skill  and  enterprise 
of  the  receivers;  but  it  proves  the  emptiness 
of  the  theoretical  superiority  of  first  mort- 
gage bonds  in  America  over  other  prior 
charges,  and  should  serve  as  a  tremendous 
warning  to  investors  not  to  put  any  faith  in 
these  documents  beyond  what  may  prop- 
erly attach  to  an  ordinary  debenture.  The 
bonds  of  a  weak  company,  as  I  have  said, 
may  be  less  secure  and  reliable  than  the  or- 
dinary stock  of  a  strong  one. 

In  America,  of  course,  these  warnings  are 
largely  unnecessary;  but  bonds,  even  of  in- 
dustrial corporations  in  the  United  States 
and  Canada,  as  well  as  in  Mexico  and  South 
America,  have  been  so  widely  and  skilfully 
advertised  in  London,  that  the  guileless  in- 
vestor, unaware  of  precedent  and  practice, 
fancies  that  he  has  got  hold  of  a  gilt-edged 
security  with  a  fairly  high  rate  of  interest, 


GOOD  SECURITIES  157 

and  that  even  in  the  event  of  bankruptcy 
his  capital  must  be  returned  to  him  intact. 
This  is  a  complete  delusion.  In  most  cases 
he  is  an  unintentional  speculator  in  loss,  with 
very  little  to  gain  in  case  the  company,  after 
default,  becomes  a  prosperous  concern.  From 
this  point  of  view  he  would  do  far  better 
to  buy  preference  stock  with  a  cumulative 
dividend.  The  bond  buyer  in  a  rickety 
railroad  or  industrial  corporation  surrenders 
the  chance  of  participation  in  increased 
earnings  in  exchange  for  the  doubtful  guar- 
antee of  a  fixed  rate  of  interest  and  a  legal 
document  (which  will  probably  be  dis- 
honoured) entitling  him  to  prompt  posses- 
sion of  the  property  in  case  of  default. 

American  bonds  are  either  for  long  or  short 
terms.  Of  the  long  term  bonds,  which  alone 
are  suitable  to  the  ordinary  investor,  there 
are  three  main  varieties,  namely,  first  and 
second  mortgage  bonds,  collateral  trust 
bonds,  and  car  trust  (or  equipment)  certifi- 
cates. Owing  to  the  established  doctrine  of 
receiverships,  none  of  these  are  what  they 
pretend  to  be — perfect  securities.  In  every 
case  the  security  depends  upon  the  prosper- 
ity of  the  company  or  corporation  and  the 
amount  of  surplus  revenue  which  remains 
after  the  interest  on  the  bond  has  been  paid. 


158          THE  STOCK  EXCHANGE 

Provided  a  property  is  otherwise  free  and 
there  is  a  guarantee  that  it  shall  remain  un- 
encumbered, I  can  see  little  to  choose  be- 
tween a  first  mortgage  bond,  an  equipment 
bond,  and  an  ordinary  debenture.  But  if 
there  is  any  conceivable  risk  of  bankruptcy 
the  would-be  investor,  who  is  really  in  search 
of  safety,  should  turn  aside  from  the  glittering 
bond  and  buy  a  public  security  issued  by  some 
respectable  government  or  municipality. 

A  debenture  may  be  defined  as  a  certificate 
of  debt  issued  by  a  corporation  or  company, 
without  mortgage  or  collateral  security.  In 
the  United  States  the  debenture  holder  is 
legally  an  unsecured  creditor;  the  bond- 
holder is  legally  secured  but  equitably  un- 
secured. What  the  debenture  holder  pos- 
sesses is  (1)  a  prior  claim  to  earnings,  and  (2) 
a  right  of  action  against  the  company  if  they 
fail  to  pay  him  his  interest  or  to  repay  him 
his  principal  when  due.  Of  course,  if  there 
is  a  first  mortgage  upon  the  property  of  an 
undertaking  which  has  issued  debentures  a 
first  mortgage  bond  is  better  than  a  deben- 
ture. The  purchaser  of  a  debenture  should 
take  care  that  this  is  not  and  cannot  be  the 
case.  The  so-called  income  bond  is  a  bond  on 
which  the  interest  or  income  is  only  payable 
according  to  the  discretion  of  the  directors, 


GOOD  SECURITIES  159 

though  in  the  event  of  a  receivership  the 
principal  must  ultimately  be  repaid  if  the 
money  will  go  round.  In  this  respect  it  is 
superior  to  preference  stock,  but  as  the  in- 
terest of  an  income  bond  is  not  cumulative, 
it  is  in  another  respect  inferior  to  a  cumulative 
preference.  The  objection  to  bonds  of  all 
kinds  in  countries  whose  courts  do  not  allow 
the  legal  security  to  become  effective  has 
now  been  clearly  stated.  The  capital  may 
be  lost  or  locked  up  for  an  indefinite  time 
in  a  receivership.  Otherwise  the  value  of  a 
specific  security  is,  as  we  have  seen,  greatest 
where  the  assets  of  the  company  are  really 
saleable  apart  from  its  good-will  as  a  going 
concern.  A  land  or  pastoral  company,  or 
a  well-situated  shop  with  a  valuable  site, 
are  cases  in  point.  Machinery  often  proves 
almost  worthless  when  an  industrial  company 
goes  bankrupt.  In  England  a  right  of  fore- 
closure is  a  real  and  effective  right,  and  a 
debenture  with  a  trust  deed  containing  this 
right  and  attaching  sufficiently  valuable  free- 
hold property  to  the  debentures  for  the  pur- 
pose, safeguards  the  security  of  the  principal, 
apart  from  the  earning  power  of  the  concern. 
Provision  for  a  sinking  fund  is  another  valu- 
able item  that  may  appear  in  a  debenture 
trust  deed ;  and  if  the  deed  is  properly  drawn 


160          THE  STOCK  EXCHANGE 

and  the  assets  attached  are  not  undervalued, 
it  will  be  found  that  the  price  of  the  deben- 
tures will  shrink  comparatively  little  when 
the  profits  of  the  company  dwindle.  This  is 
naturally  the  reverse  of  an  American  bond- 
holder's experience  when  his  corporation  be- 
gins to  go  downhill  towards  a  receivership. 

To  sum  up  the  matter.  An  investor  who 
really  wishes  to  sleep  over  his  debentures, 
and  is  not  disposed  to  haggle  about  a  quarter 
or  half  per  cent.,  should  first  and  foremost 
look  to  see  what  margin  there  has  been  of 
earnings  over  and  above  fixed  charges  in 
years  of  depression.  Next  he  will  read  the 
trust  deed,  if  any,  to  see  the  nature  of  the 
debenture  or  mortgage  issue.  Then  he  will 
find  out  what  sort  of  consideration  the  courts 
of  justice  of  the  country  or  State  in  which 
the  corporation  is  formed  are  accustomed  to 
give  (a)  to  bondholders  in  case  the  concern 
goes  bankrupt,  and  (b)  to  foreigners.  Eng- 
lish investors  often  find  that  litigation  in 
foreign  courts  is  merely  throwing  good  money 
after  bad.  A  British  company,  whether 
working  abroad  or  at  home,  is  certainly  to  be 
preferred  to  a  foreign  company,  other  things 
being  equal.  American  company  law  varies 
from  State  to  State,  and  is  often  most  un- 
satisfactory to  shareholders.  Lastly,  let  the 


GOOD  SECURITIES  161 

investor  keep  always  in  mind  that  an  ill- 
covered  bond,  so  far  from  being  a  gilt-edged 
security,  may  be  of  all  speculations  the  one 
least  likely  to  prove  profitable. 

When  we  leave  debentures  or  bonds  to 
buy  company  stock  we  put  aside  all  thought 
of  trying  to  secure  our  principal  in  the  event 
of  failure  and  bankruptcy.  As  a  rule,  the 
purchaser,  even  of  a  preference  stock,  can 
only  claim  that  it  ranks  before  ordinary 
stock  in  the  distribution  of  earnings.  True 
it  is  sometimes  provided  that  in  the  event  of 
a  company  being  dissolved  or  wound  up, 
either  compulsorily  or  voluntarily,  the  holders 
of  preferred  stock  shall  rank  before  the 
holders  of  ordinary  or  common  stock  in  the 
distribution  of  assets.  But  in  such  cases 
there  are  not  likely  to  be  any  assets  left  after 
the  creditors  have  been  satisfied.  There  are 
various  other  legal  devices  by  which  the 
technical  position  of  a  preference  holder  may 
be  strengthened  in  the  articles  of  association 
or  incorporation,  and  of  these,  perhaps  the 
most  valuable  is  a  limitation  on  the  power  of 
the  directors  to  mortgage  the  property;  for 
of  course  mortgages  and  debentures  take  pre- 
cedence of  preferred  stock,  and  every  addi- 
tion to  indebtedness  impairs  the  position  of 
preference  shareholders.  The  main  division 


162          THE  STOCK  EXCHANGE 

of  preference  stocks  is,  however,  into  cumu- 
lative and  non-cumulative.  "Cumulative" 
means,  in  the  case  of  companies  whose  profits 
fluctuate  heavily,  that  in  good  times  the 
preference  shareholder  may  hope  to  recover 
in  a  lump  the  dividends  which  he  has  lost  in 
whole  or  in  part  during  periods  of  depression. 
But  as  the  control  of  a  company  is  usually 
possessed  by  the  common  stock  it  often  hap- 
pens that  this  right  has  to  be  compromised 
during  a  reconstruction.  That  is  to  say,  in 
order  to  avoid  a  winding  up,  in  which  every- 
thing might  be  lost,  the  preference  share- 
holder has  to  consent  to  forego  his  past 
claims  for  the  sake  of  keeping  the  company 
and  his  future  hopes  alive.  But,  of  course, 
the  cumulative  type  is  far  the  better.  The 
ordinary  stock  of  good  railways  is  often  an 
excellent  investment  in  times  of  depression 
and  bad  trade.  Concerning  the  common 
stock  in  American  industrial  companies,  a 
critical  student  observes:  "It  is  usually 
,?old  at  a  low  figure,  liberal  representations 
concerning  anticipated  earnings  being  made 
to  influence  its  purchase.  These  representa- 
tions are  not  often  realised." 

One  or  two  general  observations  upon 
investments  in  both  ordinary  and  preference 
shares  may  fitly  close  this  chapter.  In  the 


GOOD  SECURITIES  163 

first  place,  a  natural  monopoly  or  a  franchise 
conferred  by  public  charter  is  the  most  stable 
basis  for  investment.  The  most  dangerous 
imaginable  prop  for  a  company  to  rest  upon 
is  a  bounty  or  a  protective  tariff  which  may 
at  any  time  be  withdrawn  or  swept  away. 
An  industry  which  flourishes  without  tariff 
aid  in  a  protected  country  is  presumably  in 
a  very  strong  condition.  The  most  impor- 
tant consideration  of  all  is  the  management, 
and  here  the  advantage  of  investment  in  a 
local  concern  with  which  the  investor  is 
well  acquainted  can  readily  be  perceived.  If 
some  change  in  the  management  occurs  of 
which  he  disapproves,  he  can  probably  get 
out  without  much  loss  (if  there  is  any  sort 
of  a  market)  before  the  concern  begins  to 
go  downhill.  Last,  but  not  least,  the  time 
to  invest  in  industrial  and  commercial  en- 
terprises of  all  kinds  is  in  periods  of  trade 
depression,  when  dividends  and  prices  are 
low.  A  prospectus  of  a  new  company  usually 
appears  in  moments  of  buoyancy  and  pros- 
perity, and  on  such  occasions  a  subscription 
is  of  course  likely  to  prove  unfortunate.  But 
this  consideration  does  not,  of  course,  apply 
to  new  issues  of  well-established  companies, 
which  may  at  any  time  require  more  capital 
for  the  profitable  extension  of  business. 


CHAPTER  VI 

SPECULATIVE   SECURITIES  AND  MODES  OF 
SPECULATION 

PROBABLY  even  in  an  old  and  conservative 
country  like  England  the  average  investor 
is  a  speculator  in  the  sense  that  he  not  only 
wishes  his  investment  to  yield  him  interest 
but  also  hopes  and  expects  that  he  will  some 
day  be  able  to  sell  out  at  a  profit.  Such  an 
aspiration  is  perfectly  natural  and  legitimate. 
Anybody  who  has  large  sums  to  invest  will 
very  properly  ask:  "Is  this  a  good  time  for 
investment?"  meaning,  of  course:  "Are 
stocks  just  now  cheap  and  below  their  normal 
level?"  Thus,  towards  the  close  of  a  war 
the  credit  of  the  belligerents  is  apt  to  be  ab- 
normally low,  and  so  long  as  there  is  enough 
revenue  left  to  pay  interest  on  the  debt  there 
is  a  good  opportunity  for  investment.  Many 
investors  in  England  and  France  made  very 
handsome  profits  by  buying  Spanish  bonds 
during  Spain's  war  with  the  United  States, 
164 


SPECULATIVE  SECURITIES        165 

or  the  bonds  of  Russia  and  Japan  when  those 
two  Powers  were  at  war  in  Manchuria.  In 
this  respect  speculative  panics  and  banking 
crises  resemble  wars.  Immense  profits  were 
reaped  by  purchasers  of  American  railroad 
stocks  in  the  autumn  and  winter  of  1907, 
when  the  American  market,  owing  to  the 
complete  collapse  of  credit,  was  in  a  state  of 
prostration,  and  dozens  of  sound  securities 
had  fallen  50  per  cent,  below  their  normal 
value.  But  when  stocks  or  commodities  are 
really  cheap  the  public  is  usually  timid;  when 
they  rise  to  absurd  heights  it  rushes  in  and 
buys  madly.  A  man  really  seems  to  require  a 
great  and  unusual  amount  of  courage  to  buy 
freely  when  securities  are  cheap,  and  none  at 
all  to  buy  when  they  are  dear.  People  think 
and  act  in  mobs;  and  the  speculative  fever 
always  rages  in  an  atmosphere  of  high 
prices. 

But  a  very  sharp  distinction  must  be  drawn 
between  the  speculator  who  buys  speculative 
securities,  or  "rubbish,"  and  the  speculator 
who  buys  sound  investment  stocks.  Thus 
in  the  American  market  there  are  well-known 
gambling  counters  such  as  Erie  or  Wabash 
or  Southern  Common — non-dividend  payers 
— which  have  no  intrinsic  value  and  therefore 


166          THE  STOCK  EXCHANGE 

move  very  rapidly  in  times  of  excitement. 
There  is  all  the  difference  in  the  world  be- 
tween these  and  the  Union  Pacific,  which  has 
paid  a  dividend  of  10  per  cent,  for  several 
years  past.  And  yet  in  the  last  six  years  the 
Union  Pacific  has  fluctuated  between  a 
maximum  of  211  and  a  minimum  of  74.  Most 
remarkable  certainly — almost  romantic — is 
the  history  of  this  line.  A  friend  of  mine  of 
middle  age  well  remembers  buying  Union 
Pacifies  at  8  and  selling  out  at  13.  In  periods 
of  excitement  these  marvels  are  dilated  upon, 
and  new  Harrimans  are  conjured  up  who 
might  perform  similar  wonders  with  the  Erie 
or  the  Southern  Railway.  But  >  nearly  all 
markets  have  rubbishy  shares  which  serve  as 
gambling  counters.  Thus  the  foreign  market 
has  the  bonds  of  Honduras,  and  of  other 
defaulting  states,  or  provinces,  or  municipali- 
ties, of  Central  and  South  America.  Every 
industrial  market  has  ordinary  shares  in  well- 
watered  companies  which  may  have  been 
successful  in  their  day,  but  are  now  practically 
hopeless.  Even  our  staid  Home  Railways 
have  weaker  brethren,  who  seldom  show  their 
heads  above  the  dividend  line. 

But  there  is  one  whole  class  of  securities 
which  are  essentially  speculative  from  causes 


SPECULATIVE  SECURITIES        167 

peculiar  to  themselves.  The  mining  markets 
and  the  new  market  for  shares  in  rubber 
securities  are  speculative,  not  because  they 
yield  no  dividends  but  because  it  is  so  difficult 
to  form  a  correct  estimate  of  their  value  from 
month  to  month  or  f rcm  year  to  year.  There 
are,  for  example,  the  South  African  gold 
mines,  known  as  "Kaffirs,"  which  date  from 
the  sensational  discoveries  on  the  Rand  in  the 
eighties  of  last  century.  There  is  the  great 
De  Beers  monopoly  of  diamonds  at  Kim- 
berley  —  a  monopoly  created  by  Mr.  Rhodes 
and  Mr.  Beit,  but  now  threatened  by  the  dis- 
coveries in  German  South- West  Africa.  There 
are  the  silver  mines  of  the  United  States, 
Mexico  and  Canada.  There  are  copper  mines 
innumerable  in  all  parts  of  the  world  from 
Rio  Tinto,  most  ancient  and  renowned  of  all, 
in  Spain,  to  the  latest  American  discoveries. 
There  are  the  old  tin  mines  of  Cornwall,  the 
modern  tin  mines  of  Malay  and  the  modernest 
of  Nigeria.  Nor  have  we  mentioned  the  gold, 
silver,  and  copper  mines  of  Australia,  among 
which  Coolgardie  and  Broken  Hill  are  pre- 
eminent, or  the  gold  mines  of  West  Africa, 
familiarly  called  the  Jungle  in  Throgmorton 
Street.  In  the  year  1907  the  leading  pro- 
ducers of  gold  were — 


168          THE  STOCK  EXCHANGE 

Ounces. 

Africa  ....  7,536,000 

U.  S.  A.         .         .         .  4,335,000 

Australia       .         .         .  3,619,000 

Mexico          .         .         .  925,000 

Russia           .         .         .  900,000 

The  Mining  List  of  the  London  Stock 
Exchange  contains  a  vast  selection  of  good, 
bad,  and  indifferent  companies.  But  even 
the  best  are  rather  speculative.  And  why? 
First  of  all,  they  are  dwindling  securities.  A 
mine  which  has  yielded  an  average  of  10  per 
cent,  in  dividends  for  the  last  five  years  looks 
very  cheap,  but  may  be  very  dear;  for  it 
may  not  have  more  than  ten  years  of  profit- 
able life.  Buying  shares  in  a  successful  mine 
is  a  little  like  buying  the  unexpired  lease  of  a 
house  without  knowing  the  date  at  which  it 
will  expire. 

In  the  second  place,  however  honestly 
however  scientifically  conducted  a  mine  may 
be,  it  is  practically  impossible  in  nearly  all 
cases  (even  assuming  the  market  value  of  the 
ore  to  remain  stable)  to  estimate  its  value  for 
investment.  When  will  the  mine  be  worked 
out?  When  will  it  cease  to  pay?  Nobody 
knows;  even  the  experts  can  only  guess,  and 


SPECULATIVE  SECURITIES        169 

their  public  guesses  are  not  always  believed. 
The  truth  is  that,  in  the  flotation  and  finance 
of  mines,  engineers  and  geologists  play  very 
much  the  same  part  that  valuers  do  as  wit- 
nesses in  arbitrations  and  rating  appeals. 
It  is  their  business  to  make  out  the  best 
valuation  they  can  for  their  clients,  and  every 
mining  failure  in  the  world  has  been  intro- 
duced to  the  credulous  public  by  highly 
coloured  pseudo-scientific  "reports"  from 
"eminent  geologists." 

Gold  exercises  a  mysterious  attraction  over 
the  uneducated  mind,  especially  in  the  City 
and  on  the  Stock  Exchange.  A  tiny  parcel 
of  gold  is  watched  with  far  more  interest  than 
a  large  cargo  of  mutton.  The  very  elect  are 
sometimes  strangely  excited  over  the  import 
or  export  of  a  few  thousand  sovereigns  or  a 
small  quantity  of  bullion.  Hence  it  has  been 
found  easy  to  float  a  gold  mine  on  less  evi- 
dence of  the  existence  of  gold  than  would  be 
needed  in  any  other  case — though  perhaps 
"Baron"  Albert  Grant's  "Emma"  silver 
mine  might  be  cited  by  partisans  of  the  white 
rival.  The  unfortunate  purchasers  of  Emma 
shares  found  out  afterwards  that  there  was 
neither  silver  nor  title,  and  eventually  for 
every  £20  subscribed  they  received  back  only 


170          THE  STOCK  EXCHANGE 

a  paltry  shilling.     Most  people  have  heard 
the  punning  epigram — 

,  "Titles  a  king  can  give,  honours  he  can't; 

Titles  without  honour  are  but  a  Baron  Grant." 

But  it  is  less  commonly  known  that  after 
the  Emma  Silver  Mine  fiasco  some  wit  added 

"  Yes,  but  you  're  in  an  even  worse  dilemma 
If  you  cannot  get  a  title  to  your  Emma." 

Nevertheless,  while  the  ordinary  mining 
prospectus  should  be  put  into  the  waste- 
paper  basket  by  any  one  who  is  not  a  mining 
expert  with  special  knowledge,  well-established 
mines  of  all  kinds,  from  coal  to  gold,  are 
legitimate,  useful,  and  often  profitable  ven- 
tures. If  the  risk  is  well  understood  and  well 
distributed,  and  if  the  wasting  character 
of  the  securities  is  generously  allowed  for 
by  the  recipient  of  dividends,  there  is  no 
reason  why  people  of  fortune  should  not 
include  a  proportion  of  mining  shares  in 
their  holdings. 

The  degree  of  risk  that  attaches  depends 
largely  upon  the  nature  of  the  product.  Gold, 
fortunately  for  gold-standard  countries,  has 
proved  itself  to  be  during  the  last  hundred 
years  one  of  the  stablest  of  all  commodities. 
Of  course  the  nominal  price  of  gold  in  a 


SPECULATIVE  SECURITIES        171 

country  with  a  gold  currency  does  not  vary  at 
all.  By  the  regulation  of  the  London  Mint,  an 
ounce  of  standard  gold  bullion  is  coined  into 
£3  17s.  10|cL  But  people  seldom  take  gold 
bullion  to  the  Mint,  as  they  would  have  to 
wait  some  time  before  receiving  the  coin. 
The  Bank  of  England  acts  as  an  intermediary. 
It  takes  gold  at  £3  17s.  9d.  and  pays  cash,  the 
difference  of  three  halfpence  per  ounce  be- 
tween the  Bank  price  and  the  Mint  price 
representing  the  Bank's  discount  and  its 
charge  for  the  work  involved.  Since  the 
closing  of  the  Indian  Mints  in  1893  to  the  free 
coinage  of  silver,  the  Indian  rupee  has  been 
fixed  at  Is.  4dL  and  is  therefore  now  a  silver 
representative  of  a  gold  standard.  Australia 
coins  sovereigns  of  the  same  weight  and  fine- 
ness as  England,  while  in  Canada  the  British 
sovereign  and  the  United  States  eagle  are  both 
legal  tender  to  any  amount.  The  currency  of 
the  United  States  is  much  complicated  and 
sadly  in  need  of  reform.  But  the  standard  is 
really  gold,  the  units  being  the  gold  dollar 
weighing  25.8  grains  and  the  gold  eagle  (or 
ten-dollar  piece)  weighing  258  grains.  An 
English  sovereign  exchanges  for  about  4  dol- 
lars 87  cents.  But  though  the  price  of  gold  is 
necessarily  invariable  in  countries  where  there 


173          THE  STOCK  EXCHANGE 

is  a  real  gold  standard,  and  where  the  Gov- 
ernment undertakes  to  coin  gold  at  a  fixed 
rate  by  weight,  it  does  not  follow  that  the 
real  price  of  gold  is  immutable.  As  a  matter 
of  fact  it  varies  constantly.  For  the  real  price 
of  gold  is  its  purchasing  power.  In  a  silver- 
standard  country  the  price  of  silver  is  fixed, 
while  the  price  of  gold  is  the  amount  you  can 
purchase  at  any  tune  in  the  standard  silver 
coin. 

Hence  in  Great  Britain,  or  the  colonies,  or 
the  United  States,  when  we  talk  of  rising 
or  falling  prices  we  are  talking  of  gold  prices. 
When  we  say  that  prices  are  rising  we  mean 
that  the  value  or  purchasing  power  of  gold  is 
diminishing,  and  when  we  say  that  prices  are 
falling  we  mean  that  its  value  or  purchasing 
power  is  rising.  It  is,  therefore,  wrong  to 
think  of  a  gold  mine  as  producing  a  metal 
whose  value  is  fixed  or  permanent.  Its  price 
in  a  gold  standard  country  is  fixed,  but  its 
value  varies.  Nevertheless,  the  comparative 
stability  of  gold  (proved  by  index  numbers 
which  measure  it  in  terms  of  commodities) 
does  certainly  reduce  one  of  the  speculative 
elements  that  play  an  important  part  in 
mining  shares. 

After  gold  probably  silver  and  iron  and 


SPECULATIVE  SECURITIES        173 

coal  come  next  in  order  of  stability;  though 
silver  has  fallen  enormously  in  the  last 
forty  years.  From  1868  to  1872  the  aver- 
age price  of  silver  was  60  pence  per  ounce. 
In  1902-3  it  fetched  only  24  pence.  Iron 
mines  are  now  very  largely  owned  by  iron  and 
steel  companies,  of  which  the  hugest  example 
is  the  Steel  Trust  of  the  United  States — a 
vast  concern  built  up  by  Mr.  Carnegie  and 
sold  on  his  retirement  to  Messrs.  J.  P.  Morgan 
&  Co.,  who  formed  thereout  the  Billion  Dollar 
Trust.  It  is  said  to  own  something  like  half 
the  iron  ore  of  the  United  States,  and  it  man- 
ufactures all  kinds  of  iron  and  steel  goods.  It 
has  also  the  distinction  of  being  almost  the 
only  United  States  industrial  corporation 
whose  securities  are  dealt  in  freely  on  the 
London  Stock  Exchange  and  quoted  on  the 
London  Stock  Exchange  List.  As  the  value 
of  iron  is  more  likely  to  increase  than  dimin- 
ish, its  debentures  are  probably  at  least  as 
good  a  security  as  those  of  a  first-class  railway 
company.  A  good  deal  of  water  has  been 
squeezed  out  of  the  ordinary  shares  by  the 
application  of  profits  to  capital;  and  the 
profits  ought  to  be  increased  rather  than 
diminished,  if  a  sweeping  reduction  of  the 
American  Tariff — now  a  possible  if  not  a 


174          THE  STOCK  EXCHANGE 

probable  event — should  be  effected,  bringing 
with  it  a  diminution  in  the  cost  of  production. 
That  the  American  iron  and  steel  industry 
needs  no  protection  is  generally  admitted. 

No  doubt  the  most  speculative  ores  are 
copper  and  tin,  and  in  these  cases  the  investor 
must  expect  his  shares  to  fluctuate  as  wildly 
as  the  metals.  A  boom  in  trade  usually 
raises  the  prices  of  tin  and  copper  far  above 
their  normal  level,  and  a  slump  like  that  of 
October  1907  causes  a  corresponding  dip  or 
depression.  Thus  between  1904  and  the 
spring  of  1907  the  price  of  copper  nearly 
doubled,  and  that  of  tin  rose  about  40  per 
cent.  Tin,  however,  is  more  easily  cornered 
than  copper,  as  the  output  is  much  smaller. 

Speculation  in  the  metal  soon  brings  about 
an  inflation  of  the  shares,  and  when  the 
bubble  is  pricked  many  of  those  who  fancied 
they  were  successful  investors,  awake  to 
discover  that  they  have  been  unsuccessful 
gamblers.  The  shadow  thrown  by  commod- 
ity prices  on  share  prices  is  often  a  long  one, 
simply  because  a  small  fall  may  wipe  out 
profits  and  dividends.  Thus  the  movements 
of  copper  company  shares  are  apt  to  be  far 
more  violent  than  those  of  copper.  The 
shares  of  Amalgamated  Copper  fluctuated 


SPECULATIVE  SECURITIES        175 

in  1904  between  a  lowest  of  44  and  a  highest 
of  85,  in  1907  between  a  lowest  of  43  and  a 
highest  of  124.  The  great  Rio  Tinto  mines 
of  Spain,  on  the  other  hand,  produce  other 
metals  also,  and  so  have  been  more  steady. 

A  comparatively  new  commodity,  rubber, 
promises  to  outdo  even  copper  in  rapidity  of 
movement;  for  its  price  has  moved  in  the 
last  few  years  from  Ss.  per  Ib.  to  l&s.,  and 
back  in  the  summer  and  autumn  of  1910  from 
12s.  to  6s.  Until  recent  years  practically  all 
the  rubber  marketed  was  "wild"  rubber; 
that  is  to  say,  it  was  obtained  by  tapping  wild 
rubber  trees,  mainly  in  Brazil  and  the  Congo. 
Fortunately  for  humanity — seeing  that  the 
collection  of  wild  rubber,  especially  in  the 
Congo,  has  been  accompanied  by  the  most 
atrocious  barbarities — it  has  been  discovered 
that  the  "Hevea  Brasiliensis,"  the  best 
variety  of  rubber  tree,  can  be  cultivated 
successfully  in  the  Malay  Peninsula,  Ceylon, 
and  some  other  tropical  countries.  A  few  of 
the  first  experimental  plantations  produced 
remarkable  results,  and  already  hi  1908  and 
1909  a  good  many  Englishmen  and  Scots, 
who  had  special  knowledge  of  their  own, 
began  to  invest  in  rubber  plantations.  To- 
wards the  end  of  1909,  as  rubber  rose  in  price, 


176          THE  STOCK  EXCHANGE 

owing  to  a  greatly  increased  demand  from  the 
United  States  for  motor  tyres,  etc.,  it  began  to 
dawn  on  the  public  that  rubber  investments 
offered  phenomenal  profits.  Just  because 
a  few  skilfully  managed  plantations,  with 
rubber  at  an  exceptionally  high  price,  did 
really  seem  to  be  worth  many  times  the  ori- 
ginal capital,  it  was  assumed  that  rubber 
trees  could  be  planted  by  anybody  almost 
anywhere  so  as  to  yield  similarly  marvellous 
results.  The  London  company  promoters 
saw  their  opportunity.  The  public  was  evi- 
dently "on  the  feed."  It  wanted  rubber 
shares,  and  it  got  them  to  the  tune  of  many 
millions  in  the  spring  of  1910.  There  were 
plenty  of  unsuccessful  planters  of  tea,  coffee, 
etc.,  in  Ceylon  and  Malaya,  who  were  de- 
lighted to  sell  "suitable"  land  at  some  high 
multiple  of  its  true  value.  So  boards  of  di- 
rectors were  assembled,  printing  presses  were 
set  to  work,  and  hundreds  of  rubber  planta- 
tion companies  were  floated  upon  a  credulous 
and  voracious  public.  Clerks  and  office  boys, 
footmen  and  nursemaids,  subscribed  with 
eagerness,  and  followed  the  tips  of  the  Daily 
Menace  with  the  unsuspecting  simplicity 
of  their  masters  and  mistresses.  It  was  a 
sad  example  of  plundering  and  blundering. 


SPECULATIVE  SECURITIES        177 

Never,  perhaps,  since  the  Kaffir  boom  had  so 
many  small  savings  been  transferred  into  less 
meritorious  pockets. 

But  the  distinctions  between  speculation 
and  investment  are  by  no  means  exhausted 
by  merely  regarding  the  quality  of  the  pur- 
chase. It  is  true  that  a  man  who  buys  Erie 
Common,  or  Nicaragua  bonds,  or  puts  his 
money  into  a  new  rubber  company,  is  a 
speculator,  while  a  man  who  buys  Pennsyl- 
vania Stock  or  German  Threes,  or  puts  his 
money  into  a  new  issue  of  an  English  munici- 
pality, is  an  investor.  But  there  is  plenty 
of  speculation  in  gilt-edged  securities;  and  in 
ordinary  times  the  typical  speculator  is  the 
fool  who  gambles  with  borrowed  money.  A 
man  with  £100  who  buys  a  Central  American 
"security"  and  puts  it  away  in  the  hope  that 
(though  it  yields  him  no  interest)  it  will  rise 
before  long  and  enable  him  to  clear  out  at  a 
handsome  profit  is  far  less  likely  to  suffer 
than  the  man  who  buys,  say,  £5,000  of  some 
good  security  for  the  account,  and  uses  his 
hundred  pounds  to  pay  contangoes  and 
differences.  How  heavy  are  the  odds  against 
this  sort  of  speculator  we  have  shown  by 
statistics  in  our  chapter  on  Wall  Street. 
But  as  long  as  civilisation  lasts  people  will 


178          THE  STOCK  EXCHANGE 

go  on  playing  this  foolish  game  in  the  face 
of  all  experience.  Just  as  in  the  case  of  a 
lottery  the  chance  of  a  gain  outweighs  the 
probability  of  a  loss. 

A  correspondent  of  mine  once  inquired: 
"Is  5  per  cent,  necessarily  speculative?  Is 
6  per  cent,  only  to  be  had  from  speculations? 
Is  it  gambling  to  buy  mining  shares  which 
yield  anything  between  5  and  10  per  cent.? 
Where  can  the  line  be  drawn?"  A  stock- 
broker, being  asked  wherein  consisted  the 
difference  between  investment  and  specula- 
tion, answered  that  speculation  means  dealing 
for  carry-over  purposes,  while  investment  ap- 
plies to  any  case  where  the  purchase  is  paid 
for.  Another,  with  a  Balfourian  turn  of  mind, 
held  that  the  real  distinction  depends  on  the 
intention  of  the  purchaser.  If  a  man  buys  a 
security  and  takes  it  up  to  hold  he  is  an  inves- 
tor, no  matter  what  the  security  may  be,  no 
matter  how  rash  or  prudent  the  choice.  On 
this  view  there  are  different  kinds  of  investors. 
Thus  one  buys  gilt-edged  securities  if  the 
chief  object  is  to  make  absolutely  sure  of 
regular  dividends;  or,  again,  if  the  main 
desire  is  to  have  a  large  income  another  will 
buy  ordinary  and  preference  stocks  with  a 
high  yield  regardless  of  risk.  Lastly,  those 


SPECULATIVE  SECURITIES        179 

aim  at  a  future  appreciation  of  capital 
rather  than  at  immediate  or  regular  dividends, 
may  buy  a  speculative  stock  like  Grand 
Trunk,  or  Steel  Common,  or  some  unlucky 
industrial,  which  appears  to  be  struggling  out 
of  its  difficulties,  intending  of  course  to  watch 
it  carefully  and  look  ahead  (which  is  what 
the  word  "speculation"  implies),  whereas  the 
gilt-edged  man  prefers  something  he  can  sleep 
over.  Upon  this  view  speculation  comes  in 
where  the  buyer's  intention  is  not  to  pay  but 
to  get  out  with  a  profit  if  possible  before  the 
end  of  the  account,  or  after  a  series  of  con- 
tinuations at  some  future  account.  Such  a 
man  may  fairly  be  said  to  be  playing  or 
gambling  with  his  money,  and  not  dealing 
with  it  seriously  or  permanently  as  it  is  the 
intention  of  an  investor  to  do.  I  am  not  quite 
satisfied  to  allow  the  distinction  between 
speculation  and  investment  to  rest  upon  in- 
tention. The  foundation  is  rather  too  slip- 
pery. It  reminds  me  of  the  eminent  sophist 
who,  at  an  early  stage  of  our  fiscal  contro- 
versy, argued  that  the  question  whether  a 
duty  is  protective  or  not  depends  upon 
whether  the  Government  imposing  it  in- 
tended it  to  be  protective. 

If,  as  a  matter  of  fact,  a  man  is  running 
risks  and  is  speculating  he  cannot  be  called 


180          THE  STOCK  EXCHANGE 

an  investor  on  the  ground  that  he  is  unaware 
of  the  fact  that  he  is  running  speculative 
risks.  Perhaps  a  distinction  may  be  drawn, 
however,  between  a  member  of  the  outside 
public  and  a  person  who  is  actually  in  the 
market.  The  moment  an  outsider  begins  to 
borrow,  and  gets  out  of  his  depths,  he  is 
certainly  gambling  or  speculating,  even  if 
the  stocks  he  is  interested  in  are  Consols. 
On  the  other  hand,  a  member  of  the  Stock 
Exchange,  who  makes  a  regular  business  of 
buying  and  selling  shares,  can  hardly  be  called 
a  speculator  in  any  vicious  sense  if  he  works 
with  borrowed  money.  A  member  of  the 
Stock  Exchange  almost  always  has  an  interest 
in  the  market,  and  probably  uses  his  credit 
freely;  but  it  is  difficult  to  see  much  difference 
between  him  and  a  wholesale  dealer  or  mer- 
chant in  wheat,  cotton,  wool,  etc.,  who  often 
has  to  rely  on  his  banker  for  75  per  cent,  of 
the  value  of  his  purchases. 

So  much  for  the  difference  between  specula- 
tion and  investment.  But  we  have  still  to 
touch  upon  the  technical  side  of  the  subject, 
which  calls  for  a  brief  statement  of  the  mode 
or  modes  of  conducting  speculation  on  the 
London  Stock  Exchange;  and  for  this  pur- 
pose we  may  accept  as  a  practical  definition 


SPECULATIVE  SECURITIES        181 

of  the  speculator  a  person  who  interests  him- 
self in  the  temporary  fluctuations  of  shares, 
who  bets  or  wagers  (though  not  within  the 
meaning  of  the  Gaming  Acts)  that  certain 
securities  will  rise  or  fall.  If  the  contract  were 
a  gaming  contract  within  the  meaning  of  the 
Gaming  Acts  it  would  be  null  and  void  in  the 
eyes  of  the  law,  and  neither  party  would  be 
able  to  enforce  it.  The  reason  why  a  specula- 
tive contract  with  a  Stock  Exchange  broker  is 
legal  and  enforceable  is  that  the  motive  of  the 
buyer  or  seller  has  nothing  to  do  with  the 
contract.  The  broker  may  not,  and  often 
does  not,  know  whether  his  client  will  take  up 
the  purchase,  or  whether  he  will  actually  part 
with  the  stock  which  he  instructs  the  broker 
to  sell.  One  plain  difference  between  a  Stock 
Exchange  speculation  and  a  bet  upon  a  horse 
is  that  in  the  case  of  the  bet  one  party  loses 
and  the  other  gains,  whereas  if  A  commissions 
B  to  buy  him  £100  of  shares  and  they  rise  to 
£110,  B  loses  nothing  by  paying  £10  to  A  on 
the  conclusion  of  the  account.  But,  generally 
speaking,  when  speculation  in  stocks  is  carried 
on  with  an  outside  broker  or  "bucket  shop" 
(i.  e.  between  two  principals)  the  law  holds  it 
to  be  a  gaming  contract.  This  is  in  itself 
a  sufficient  reason  against  speculative  persons 


182          THE  STOCK  EXCHANGE 

dealing  with  these  establishments.  If  they 
win  heavily  they  will  very  likely  not  be 
paid. 

.  The  reader  will  probably  have  a  pretty 
clear  idea  from  previous  chapters  of  the  two 
kinds  of  speculation — for  the  rise  and  for  the 
fall.  The  Bull,  who  speculates  for  the  rise, 
buys  stock,  and  the  Bear,  who  speculates  for 
the  fall,  sells  it.  The  one  buys  in  the  hope  of 
selling  at  a  profit;  the  other  sells  in  the  hope 
of  buying  back  after  the  stock  has  cheapened, 
and  so  pocketing  the  difference.  A  bear 
operator  is  said  to  sell  "short,"  because  he 
sells  what  he  has  not  got,  and  when  the  time 
comes  to  fulfil  the  contract  he  has  to  borrow 
stock.  As  the  fluctuations  of  stock — their 
ups  and  downs — must  on  the  average  over  a 
long  period  be  more  or  less  equivalent,  it 
would  follow  that  the  operator  least  likely 
to  lose  would  be  the  person  with  a  "flair"  for 
the  market  who  was  just  as  ready  to  be  a 
bear  as  to  be  a  bull.  But  as  a  matter  of  fact 
the  great  majority  of  speculators  are  always 
bulls.  Optimism  seems  to  be  of  the  essence  of 
speculation.  A  boom  like  the  Kaffir  boom,  or 
the  rubber  boom,  requires  the  enthusiastic 
co-operation  of  a  credulous  public.  The 
public  understands  how  it  may  make  money 


SPECULATIVE  SECURITIES  183 

out  of  a  rise,  but  it  cannot  understand  how  to 
make  money  out  of  a  fall.  So  it  will  borrow 
for  the  rise  but  not  for  the  fall. 

On  the  London  Stock  Exchange  there  are 
monthly  accounts  or  settlements  for  the 
Consol  market,  and  "fortnightly"  accounts, 
varying  from  11  to  14  days,  for  other  stocks. 
The  actual  account  or  settlement  covers  four 
days:  (1)  the  Mining  Contango  Day;  (2) 
the  general  Contango  Day;  (3)  the  Ticket  or 
Name  Day;  (4)  the  Account  Day,  formerly 
known  as  the  Settlement,  or  Pay  Day.  Ac- 
count therefore  means  either  the  whole  "fort- 
night" or  month  over  which  an  account  runs, 
or  the  actual  days  of  settlement,  or  the  Fourth 
Day  of  the  Settlement.  For  "Contango" 
another  name  is  "Continuation"  or  "Carry 
over."  The  two  Contango  days  are  of  com- 
paratively modern  growth,  necessitated  by 
the  increasing  volume  of  speculative  accounts 
which  require  extra  days  for  the  settling  of 
bargains.  Stocks  and  shares  bought  or  sold 
for  the  current  account  must  be  either  paid 
for  on  Pay  Day,  or  carried  over  (continued) 
on  Contango  Day.  The  speculator  for  the 
rise,  who  does  not  wish  to  cut  a  loss  or  realise 
a  profit,  instructs  his  broker  to  carry  over  or 
continue  his  shares.  In  that  case  the  trans- 


184          THE  STOCK  EXCHANGE 

action  is  postponed  for  a  consideration,  and 
interest  is  charged  for  holding  over  the  stock 
to  the  next  settlement.  This  interest  is  called 
the  contango  rate.  Thus,  as  a  rule,  the  bull 
pays  a  contango  rate,  and  the  bear  who  is 
speculating  for  a  fall  is  said  to  "take  in"  the 
securities  and  to  receive  the  rate  or  contango. 
But  sometimes  in  a  depressed  and  bearish 
market,  the  bear  has  to  pay  a  "backwarda- 
tion" instead  of  receiving  a  contango.  It  is 
all  a  question  of  demand  and  supply.  If  there 
is  a  demand  for  money  and  a  plentiful  supply 
of  stock  there  is  a  contango;  if  there  is  a 
scarcity  of  stock  for  delivery  against  sales 
there  is  a  "backwardation"  to  be  paid  by 
sellers  who  are  short  of  stock.  If  on  balance 
there  are  securities  which  cannot  be  adjusted, 
the  bulls  have  to  pay  for  an  excess,  or  the 
bears  for  a  deficiency.  In  the  case  of  the 
bears  this  means  either  delivering  the  stock 
they  have  sold,  or  borrowing  it  from  a  holder, 
undertaking  to  replace  it  on  the  next  account 
day.  All  this  is  very  difficult  and  technical. 
But  it  is  worth  even  the  investor's  while  to 
master  the  rudiments  of  the  subject;  for 
temporary  causes  of  market  fluctuations  have 
to  be  allowed  for.  Enough  has  at  least  been 
said  to  show  that  the  bull  is  a  fictitious  buyer, 
who  borrows  money  in  order  to  keep  his  pur- 


SPECULATIVE  SECURITIES        185 

chase  going,  while  the  bear  is  a  fictitious  seller, 
who  borrows  stock  in  order  to  keep  his  sale 
going.  Both  have  to  pay  commissions,  either 
at  each  account  or  at  the  end  of  the  transac- 
tion, and  both  either  pay  or  receive  "differ- 
ences"  according  as  they  gain  or  lose  during 
each  account.  The  student  of  market  fluctua- 
tions is  interested  in  the  contango  rate.  If  it 
is  high  it  shows  that  there  are  a  great  number 
of  bulls,  if  it  is  low  or  disappears  into  a  "back- 
wardation" it  shows  that  the  bears  are  pre- 
dominant. In  either  event  there  is  likely  to 
be  a  change  in  the  market  as  a  result  of  profit- 
taking  along  with  real  sales  in  the  one  case 
and  real  purchases  in  the  other.  But  of  late 
years  another  kind  of  speculation  has  become 
fashionable,  which  tends  to  rob  stock  ex- 
change operators  of  this  index  to  the  condition 
and  immediate  future  of  a  market.  Instead 
of  paying  contango  rates  and  commissions,  a 
speculator  will  pledge  securities  with  his  bank, 
and  with  the  loan  so  obtained  will  buy  other 
securities  and  hold  for  a  rise.  The  advantage 
of  this  method  is  that  there  is  no  commission 
or  contango  rate.  The  disadvantage  to  the 
mere  gambler  is  that  his  speculation  is  limited 
by  the  amount  of  securities  he  can  pledge. 
Moreover,  the  scientific  operator,  who  wishes 
to  benefit  by  foreseeing  a  fall  as  well  as  a  rise, 


186          THE  STOCK  EXCHANGE 

is  helpless.  If  he  leans  on  a  banker's  loan 
he  can  only  be  a  bull;  if  he  wants  to  sell  stock 
short  he  must  go  to  a  broker  and  follow  the 
method  above  described. 

It  remains  to  describe  "options,"  a  favour- 
ite method  with  members  of  the  Stock  Ex- 
change and  one  much  in  vogue  with  foreigners. 
There  are  three  kinds  of  options. 

(1)  The  Put.    Smith  contracts  to  pay  Jones 
money  for  the  right  to  sell  him  a  certain  se- 
curity on  a  given  date,  at  a  named  price. 

(2)  The  Call.    Smith  contracts  to  pay  Jones 
money  for  the  right  to  buy  from  him  a  certain 
security  on  a  given  date,  at  a  named  price. 

(3)  The  Put  and  Call,  or  Double  Option, 
known    in    Wall    Street    as    a    "straddle." 
Under  this  the  person  who  buys  the  option 
buys  the  right  either  to  sell  or  buy  the  se- 
curity named  on  a  given  date,  at  a  named 
price.     The    double    option    usually     costs 
double  as  much  as  the  Put  or  the  Call. 

If  the  line  between  common  speculative 
accounts  and  a  bet  or  wager  appears  rather 
fine,  it  is  almost  invisible  in  the  case  of 
options  to  the  naked  eye  of  an  ordinary  ob- 
server, and  hardly  visible  in  the  case  of  a 
double  option,  even  to  the  sharp  eyes  of  judges 
whose  lives  have  been  given  up  to  the  mak- 
ing and  refining  of  distinctions. 


CHAPTER  VII 

WHY   THE   PRICES   OF   SECURITIES 
RISE   AND   FALL 

To  the  economist  few  inquiries  are  more 
difficult  or  more  fascinating  than  that  which 
is  directed  to  the  causes  of  price  movements. 
It  leads  him  into  the  remotest  abstractions 
of  monetary  theory,  into  subtle  disquisitions 
on  the  delicate  fabric  of  credit,  and  some- 
times carries  him  through  a  maze  of  statistics 
into  imaginary  parallels  between  the  recur- 
rence of  sun  spots  and  of  commercial  crises. 
To  the  business  man  who  must  always  be 
something  of  a  speculator — for  he  wants  to 
buy  for  the  future  when  things  are  cheap  and 
be  short  of  stock  when  they  are  dear — a  scent 
for  prices  is  of  overwhelming  practical  im- 
portance. But  he  can  seldom  afford  to  take 
long  views.  He  proceeds  mainly  by  rule  of 
thumb.  The  gold  problem,  and  the  silver 
problem,  and  the  credit  problem  are  to  him 
unsolved  and  insoluble  puzzles.  Perhaps, 
187 


188          THE  STOCK  EXCHANGE 

even  if  he  could  understand  the  professors, 
he  would  not  get  along  very  much  better. 

Still  there  are  principles  and  rules  drawn 
partly  from  experience,  partly  from  the 
operations  of  reason  and  common  sense, 
which  deserve  to  be  plainly  stated  even 
though  our  space  is  altogether  too  limited  for 
any  exhaustive  discussion.  In  the  first  place, 
the  prices  both  of  commodities,  and  securities 
depend  upon  the  law  of  supply  and  demand. 
If  the  world's  demands  for  woollen  and 
worsted  cloth  remain  unchanged  while  the 
supply  of  sheep's  wool  increases,  then  the 
price  of  wool  is  bound  to  fall;  if  they  decrease 
then  the  price  rises.  Again,  if  the  supply  of 
wool  remains  constant,  and  the  demand  for 
cloth  rises  or  falls,  the  price  of  wool  will  rise 
or  fall  until  an  equilibrium  is  attained. 
Other  things  being  equal,  an  increase  of 
supply  or  a  diminution  of  the  demand  lowers 
the  price,  while  a  decrease  of  the  supply  or 
an  augmentation  of  the  demand  raises  it. 
Thus  when — to  meet  the  expenses  of  the 
Boer  War — our  Government  issued  more 
than  150  millions  of  Consols  and  Exchequer 
bonds,  and  Treasury  bills,  the  price  of  Con- 
sols fell  heavily;  and  when  the  war  was  over, 
it  was  found  that  the  proportion  by  which 


PRICES  OF  SECURITIES  189 

the  National  Debt  had  increased  corre- 
sponded almost  exactly  with  the  proportion 
by  which  the  price  of  Consols  had  fallen, 
showing  that  the  public  demand  for  gilt- 
edged  securities  had  remained  fairly  constant. 
There  is  therefore  at  least  one  fundamental 
cause  of  price  variations  which  applies  equally 
to  commodities  and  securities. 

Again,  as  was  indicated  in  the  preceding 
chapter,  a  close  parallelism  is  to  be  found 
when  you  have  a  security  whose  rate  of  inter- 
est depends  on  the  profit  derived  from  a  raw 
material.  The  shares  in  copper  mines,  or 
tin  mines,  or  rubber  plantations,  are  obvious 
cases  in  point.  The  market  for  the  shares 
fluctuates  freely  with  the  selling  price  of  the 
product.  It  was  the  enormous  rise  in  the  price 
of  rubber  from  3s.  to  12,?.  per  Ib.  that  caused 
the  rubber  share  boom;  and  as  soon  as  the 
prices  of  rubber  at  the  auctions  in  Mincing 
Lane  began  to  fall  the  downward  movement 
in  rubber  shares  commenced.  While  rubber 
prices  were  at  the  top,  rubber  plantation  com- 
panies were  floated  successfully  by  the  hour. 
When  the  slump  came  the  fish  ceased  to  bite, 
and  the  company  promoter  turned  his  atten- 
tion from  rubber  to  other  things. 

Another  supposed  connection  between  com- 
modity prices  and  security  prices  may  be 


190          THE  STOCK  EXCHANGE 

noted.  Except  in  countries  with  a  silver 
standard,  or  in  those  unhappy  communities 
which  are  at  the  mercy  of  an  inconvertible 
paper  currency,  prices  mean  gold  prices. 
Hence  a  great  increase  in  the  production  of 
gold  tends  to  reduce  its  purchasing  power  and 
so  to  raise  prices,  while  a  great  diminution 
in  the  output  tends  to  increase  the  purchasing 
power  and  so  to  lower  the  general  level  of 
prices.  But  in  the  case  of  interest-bearing 
securities  this  factor  is  almost  negligible;  for 
the  value  of  the  security  depends  primarily 
upon  the  rate  of  interest  which  it  bears,  and 
the  rate  of  interest  has  no  real  connection  with 
the  relation  between  the  quantity  of  gold  in 
the  world  and  the  quantity  of  securities. 
Roughly  speaking,  the  yield  of  Consols  was 
much  the  same  (about  3  per  cent.)  in  1750, 
in  1850,  and  in  1910;  but  of  course  the  out- 
put of  gold  and  the  relation  between  gold  and 
securities,  or  gold  and  silver,  or  gold  and 
credit  were  so  entirely  different  at  the  three 
dates  that  no  scientific  mind  would  dream  of 
attempting  to  bring  these  things  into  com- 
parison. The  fluctuations  of  the  Bank  of 
England's  gold  reserve  are  a  barometer  of  the 
London  money  market,  and  gilt-edged  securi- 
ties naturally  tend  to  fall  when  the  short  loan 


PRICES  OF  SECURITIES  191 

and  discount  rates  rise.  But  the  price,  or  pur- 
chasing power,  of  gold  has  no  connection  with 
the  price  of  money  or  credit.  Money  may 
become  dearer  while  the  output  of  gold 
diminishes,  or  cheaper  while  it  increases. 

And  here  for  the  sake  of  clearness,  in  order 
to  make  quite  plain  what  money  is  and  what 
it  does  and  why  its  purchasing  power  varies 
at  different  times  in  the' same  country,  and  at 
the  same  time  in  different  countries  where 
different  standards  or  different  tariffs  are  in 
force,  we  shall  permit  ourselves  to  digress  a 
little  upon  the  meaning  of  money. 

Modern  monetary  systems  may  be  divided 
into  three  main  varieties — gold  standard,  sil- 
ver standard,  and  inconvertible  paper.  Gold 
standard  countries  usually  have  a  token  cur- 
rency of  silver  and  copper  or  nickel  for  the 
convenience  of  retail  purchases,  and  also 
bank-notes  issued  by  the  authority  of  the  State 
for  the  transference  of  large  sums.  If  the  gold 
standard  is  absolute,  as  in  England,  then 
bank-notes  are  absolutely  and  at  all  times  con- 
vertible into  gold.  In  France,  which  retains  a 
system  aptly  described  as  limping  bimetallism, 
the  notes  of  the  bank  of  France  may  be  met 
by  that  institution  in  either  gold  or  silver, 
and  as  the  silver  is  not  worth  its  face  value 


192          THE  STOCK  EXCHANGE 

a  bill  on  Paris  cannot  compete  with  a  bill  on 
London  for  international  purposes.  But  in 
France  and  in  all  the  countries  of  the  Latin 
Union,  however  large  the  stock  of  silver  and 
however  much  silver  predominates  in  the 
actual  currency,  the  prices  current  are  gold 
prices,  the  purchasing  power  of  the  silver  coin 
being  not  its  intrinsic  value  but  its  conven- 
tional value  as  a  fraction  of  the  napoleon 
or  other  gold  coin  having  a  certain  fineness 
and  weight.  Thus  so  many  sovereigns  ex- 
change for  so  many  napoleons  simply  because 
both  are  gold  coins  of  a  known  weight;  and  so 
many  shillings  exchange  for  so  many  francs 
because  20  shillings  go  to  a  pound  and  20 
francs  to  a  napoleon.  In  China,  on  the  other 
hand,  which  (in  so  far  as  it  has  any  standard 
at  all)  has  a  silver  standard,  the  prices  are 
silver  prices,  and  their  movements  are  quite 
independent  of  movements  in  gold-standard 
countries.  Thus  in  a  given  month  the  price 
of  wheat  or  rice  may  fall  in  Pekin  while  it 
rises  in  Paris  or  London.  This  means  that 
all  the  world  over  an  ounce  of  silver  will  buy 
more  wheat  at  the  end  of  the  month  than  at 
the  beginning,  and,  conversely,  that  an  ounce 
of  gold  will  buy  less  wheat  all  the  world  over, 
at  the  end  than  at  the  beginning  of  the  month. 


PRICES  OF  SECURITIES  193 

It  also  means  that  the  price  of  silver  in  gold 
currency  has  risen  while  the  price  of  gold  in 
silver  currency  has  fallen. 

The  worst  kind  of  currency  is  an  incon- 
vertible paper  currency,  and  some  important 
countries,  such  as  Russia  and  Brazil,  are  still 
on  a  paper  basis.  They  endeavour  however, 
by  keeping  a  large  gold  reserve  in  a  central 
bank,  to  maintain  a  fixed  relation  between 
gold  and  paper.  Where  no  such  relation  is 
maintained,  as  in  Chile,  the  most  deplorable 
and  fraudulent  confusions  result.  There  is, 
indeed,  nothing  so  demoralising  to  business 
as  an  inconvertible  paper  currency  which 
fluctuates  in  accordance  with  the  "dis- 
cretion" of  a  corrupt  Government.  It  will 
be  seen,  then,  that  commercial  relations  be- 
tween gold-using  countries  are  comparatively 
simple,  but  that  exchanges  between  gold  and 
silver  standard  countries,  or  gold  and  paper 
countries,  may  be  extremely  changeful  and 
hazardous.  In  such  cases  a  speculative  ele- 
ment enters  into  international  transactions. 
It  was  this  consideration  among  others  that 
prompted  the  British  Government  to  regulate 
the  Indian  currency  and  to  fix  the  value  of 
the  rupee  so  that  the  external  trade  of  India 
with  its  chief  customers  might  be  simplified, 


194          THE  STOCK  EXCHANGE 

and  its  internal  prices  might  not  suffer  from 
the  fluctuations  of  a  metal  so  variable  as 
silver  had  then  become. 

The  slight  variations  of  exchange  between 
gold-standard  countries  depend  upon  the 
balance  of  trade  and  indebtedness  at  any 
given  time.  If  in  order  to  balance  indebted- 
ness it  is  necessary  to  send  gold  from  London 
to  Paris  or  New  York  the  exchange  is  said  to 
be  unfavourable  to  England  and  vice  versa. 
This  uncertainty,  it  will  readily  be  under- 
stood, introduces  a  slight  element  of  specula- 
tion into  the  arbitrage  dealings  between  the 
leading  bourses. 

But  whether  it  be  of  gold,  or  silver,  or 
paper,  money  in  every  country  of  the  world 
is  the  measure  of  value  and  the  medium  of 
exchange.  The  price  of  a  thing  is  its  value 
as  measured  in  the  country's  money.  When 
the  farmer  exchanges  his  wheat  for  clothing 
and  machinery,  he  does  not  barter.  He  first 
sells  his  wheat  for  money,  and  then  uses  the 
money  to  buy  what  he  needs.  The  proper- 
ties of  good  money — as  the  professors  rightly 
declare — are  that  it  should  be  portable, 
coinable,  divisible,  indestructible,  and  stable 
in  value.  "Portable"  really  means  "pre- 
'  eious"  as  gold  or  diamonds  are  precious,  i.  e. 


PRICES  OF  SECURITIES  195 

small  and  costly.  "Coinable"  means  that 
it  can  easily  be  melted,  cast  into  equal  sizes, 
and  stamped  with  a  recognisable  mark. 
Thus  gold,  silver,  copper,  are  ductile  and 
coinable.  "Divisible"  means  that  it  must 
not  lose  value  when  divided.  Thus  two  half- 
ounces  of  gold  or  copper  are  worth  as  much  as 
one  ounce.  But  if  a  large  gem  is  cut  into 
small  ones  it  may  lose  most  of  its  value. 
"Indestructibility"  is  a  most  important 
quality.  The  wear  and  tear  of  a. gold  coin 
is  so  incredibly  small  that  hardly  any  saving 
is  effected  by  keeping  the  gold  in  banks  and 
issuing  gold  certificates  like  the  one-pound 
notes  in  Scotland.  The  possession  in  so 
remarkable  degree  of  all  these  qualities  has 
led  to  the  establishment  of  gold  as  the  stan- 
dard of  value  and  measure  of  exchange  in 
most  countries,  with  silver  as  the  subsidiary 
coin  and  copper  or  nickel  as  token  for  petty 
payments.  The  last-named  property  of  good 
money — "stability  in  value" — requires  a  few 
words  of  explanation.  By  what  can  only  be 
described  as  a  piece  of  great  good  fortune  the 
value  (that  is  to  say  the  purchasing  power) 
of  gold  has  been  during  the  last  century  ex- 
traordinarily steady.  If  you  look  at  any  par- 
ticular commodity  such  as  wheat,  or  wool, 


196          THE  STOCK  EXCHANGE 

or  cotton,  or  iron,  or  silver,  or  rubber,  you  will 
find  that  its  prices  in  gold  fluctuate  enor- 
mously from  year  to  year,  and  sometimes  even 
from  month  to  month.  But  if  you  take 
twenty  commodities  you  find  that  their  prices 
hardly  ever  rise  and  fall  together.  Thus  in 
the  old  days,  when  harvests  were  all-impor- 
tant, it  used  to  be  said  that  if  wheat  were  cheap 
wool  would  be  dear,  and  vice  versa.  For 
when  the  poor  had  cheap  bread  they  could 
buy  clothes,  and  so  there  was  a  greatly  in- 
creased demand  for  wool,  and  wool  necessarily 
rose  in  price.  Of  course  a  great  diminution 
in  the  output  of  gold  will  ultimately  increase 
its  purchasing  power  and  lower  the  general 
level  of  prices,  whereas  a  great  increase  of 
the  output,  such  as  that  which  followed  the 
gold  discoveries  in  Australia  in  the  middle,  or 
the  gold  discoveries  on  the  Rand  at  the  end 
of  last  century,  must  tend  to  decrease  the 
value  and  lower  the  purchasing  power  of  gold, 
that  is  to  raise  the  gold  prices  of  commodities. 
But  just  because  of  its  indestructibility  the 
mass  of  gold  in  the  world  is  so  enormous  in 
comparison  with  what  the  mines  can  add  to 
it  in  a  year  that  the  effect  of  an  increase  or 
diminution  in  output  is  at  first  very  slight; 
and  whenever  the  supply  is  enlarged  the  effect 


PRICES  OF  SECURITIES  197 

is  apt  to  be  balanced  or  nearly  balanced  either 
by  an  increase  in  the  production  of  other  com- 
modities or  by  an  enlarged  demand  for  gold 
from  Governments  which  have  established  a 
gold  currency,  or  from  banks  which  wish  to 
strengthen  their  reserves  of  the  precious  metal. 
The  relation  between  gold  and  credit  is 
subtle  and  difficult.  Many  able  writers  main- 
tain stoutly  that  gold  is  the  basis  of  credit, 
and  city  men  are  very  fond  of  attributing 
changes  in  the  price  of  money,  movements 
of  securities  and  upheavals  of  credit  to  gold 
production  or  gold  movements.  But  gold 
is  by  no  means  essential  to  credit.  Credit 
exists  in  all  civilised  countries,  where  there 
is  a  demand  for  it  by  substantial  persons, 
without  regard  to  the  question  whether  there 
is  a  gold  standard  or  not.  The  real  basis  of 
credit  is  credibility.  Gold  cannot  make  credit 
or  cure  credit.  Bankers  may  come  to  grief 
at  a  time  when  the  reserves  of  gold  are  un- 
usually large.  A  bank  with  a  25  per  cent, 
reserve  of  gold  against  its  liabilities  may 
collapse  through  misuse  of  credit  when  a  bank 
with  a  5  per  cent,  reserve,  conservatively 
managed,  may  be  perfectly  safe  and  unassail- 
able. On  the  other  hand,  great  gold  dis- 
coveries and  a  greatly  increased  output  of 


198          THE  STOCK  EXCHANGE 

gold  may  cause  a  general  rise  of  prices,  which 
again  may  produce  a  fever  of  speculation. 
And  as  a  speculative  boom  causes  a  strain 
upon  credit,  the  money  markets  of  the  world 
become  tight  and  a  general  crisis  and  depres- 
sion will  result.  Thus  there  may  be,  and  at 
times  there  is,  a  close  causal  connection 
between  gold  and  credit  or  gold  and  specula- 
tion. The  best  known  example  is  perhaps 
to  be  found  in  the  events  following  the  gold 
discoveries  in  Australia.  But  this  inquiry 
would  take  us  too  far  from  our  path. 

But  whatever  be  the  relationship  of  gold  to 
the  money  market,  the  money  market  cer- 
tainly has  a  far  greater  effect  upon  the  prices 
of  securities  than  upon  the  prices  of  commo- 
dities. For  speculative  buying  and  selling 
affect  nearly  all  classes  of  stocks  and  shares; 
and  gilt-edged  securities,  which  can  be  sold  at 
a  moment's  notice,  are  always  in  demand 
when  money  is  unlendable  in  the  short  loan 
market.  At  such  a  time  capitalists  who  lend 
in  this  market  are  apt  to  buy  consols  and  kin- 
dred securities,  keeping  them  until  money 
and  discount  rates  rise.  Thus  consols  tend  to 
rise  owing  to  professional  buying,  when  money 
is  cheap,  and  to  fall,  owing  to  professional 
selling,  when  money  becomes  dearer.  There 


PRICES  OF  SECURITIES  199 

is  therefore  a  real  connection  between  the 
price  of  consols  and  the  bank  rate;  and  when 
the  consol  market  hears  of  a  probable  or  act- 
ual rise  in  the  bank  rate  it  usually  anticipates 
this  sequence  and  makes  consols  a  fraction 
lower.  And  as  a  general  rule  a  rise  in  the 
bank  rate  (by  enhancing  the  charges  for  bor- 
rowed money)  acts  in  restraint  of  specula- 
tion, not  only  in  stocks  and  shares,  but  also 
in  grain,  cotton,  copper,  rubber,  iron,  tin  and 
other  commodities  which  lend  themselves  to 
speculation  in  futures. 

But  by  this  time  a  reader  may  be  getting 
impatient.  He  may  be  saying,  and  probably 
is  saying,  to  himself:  "Why  cannot  he  come 
to  business,  and  tell  me  why  Stock  Exchange 
prices  jump  up  and  down  in  such  extraordi- 
nary ways  without  the  least  regard  to  gold, 
or  bank  rate,  or  any  of  these  abstruse  pheno- 
mena?" Perhaps  the  writer  has  a  secret 
sympathy  with  this  critic.  At  any  rate  he 
will  bow  to  the  wish,  and  give  as  plain  answer 
as  he  can  to  a  plain  question. 

In  the  first  place,  apart  altogether  from 
the  causes  which  affect  the  prices  of  com- 
modities as  well  as  the  prices  of  securities, 
the  value  of  a  security  depends  mainly 
upon  a  quality  or  attribute  which  a  bale  of 


800  THE  STOCK  EXCHANGE 

cotton,  or  a  ton  of  coal,  or  a  suit  of  clothes, 
does  not  possess.  It  is  either  actually  or 
potentially  interest-bearing.  This  quality  is 
visible  in  a  bond  with  coupons  attached.  A 
bond  like  that  for  example  which  is  bought  by 
subscribers  to  a  Prussian  State  loan  will  have 
attached  to  it  quarterly  or  half-yearly  cou- 
pons, which  can  be  cashed  on  the  date  when 
they  become  due  anywhere  in  Germany,  or 
in  almost  any  great  centre  of  finance.  If  the 
interest  is  4  per  cent,  and  the  coupons  are 
half-yearly,  each  coupon  attached  to  a  bond 
for  a  thousand  marks  will  be  exchangeable  for 
20  marks  cash.  If  the  Prussian  Government 
promises  to  redeem  the  bond  at  the  end  of  a 
period,  say  of  twenty  years,  at  par,  it  is 
obvious  that  at  its  maturity  the  bond  will  be 
worth  par,  neither  more  nor  less.  So  if  the 
purchaser  got  it  at  a  subscription  price  of  990 
marks  he  will  get  the  principal  back  with  10 
marks  additional.  In  the  mean  time  it  will 
rise  and  fall  according  to  the  conditions,  first 
of  German  credit,  secondly  of  the  interna- 
tional rate  of  interest.  If  the  German  Gov- 
ernment has  a  long  series  of  deficits,  its  credit 
will  tend  to  fall;  if  it  has  a  long  series  of  sur- 
pluses and  is  so  able  to  reduce  debt,  its  credit 
will  tend  to  rise.  But  these  tendencies  may  be 


PRICES  OF  SECURITIES  201 

wholly  or  in  part  counteracted  by  antagonist 
tic  movements  of  an  international  character. 
A  great  war  like  that  between  Japan  and 
Russia  destroys  a  vast  amount  of  capilal 
and  absorbs  vast  quantities  of  savings. 
Money  which  might  have  bought  German 
bonds  was  diverted  by  high  and  attractive 
rates  of  5,  6  or  7  per  cent,  into  the  new  bonds 
issued  by  Russia  and  Japan  for  the  purpose  of 
defraying  war  expenses.  But  the  Prussian 
State  bond,  to  which  we  have  referred,  is  not 
likely  to  fluctuate  much,  and  the  limits  of  its 
fluctuation  will  be  more  and  more  restricted 
the  more  nearly  it  approaches  its  maturity, 
when  the  holder  of  it  is  entitled  to  be  paid  off 
in  cash.  Thus,  while  the  intrinsic  value  of  a 
coat  or  a  pair  of  boots  depends  upon  its 
warmth,  durability,  fit,  etc.,  the  value  of  a 
security  depends  mainly  upon  (1)  the  rate  of 
interest,  (2)  the  safety  of  the  principal,  (3)  the 
likelihood  of  the  principal  or  the  rate  of  inter- 
est either  rising  or  falling.  The  quality  of  a 
good  bond  is  security  of  a  fixed  rate  of  interest 
and  security  of  principal.  The  quality  of  a 
good  share  is  the  probability  that  it  will  rise  in. 
value,  and  that  the  rate  of  interest  or  dividend 
will  improve.  Here,  then,  we  have  the  main 
causes  of  a  rise  or  fall  in  securities. 


202          THE  STOCK  EXCHANGE 

But  the  business  of  Stock  Exchange  opera- 
tors is  to  endeavour  to  forecast  and  discount 
in  advance  the  natural  fluctuations  of  intrinsic 
value.  In  the  old  days,  before  the  telegraph, 
when  postal  communications  were  slow  and 
untrustworthy,  fortunes  were  made  by  getting 
early  information,  or  spreading  false  informa- 
tion, of  victories  and  defeats,  which  would 
enchance  or  depress  the  price  of  Government 
stocks.  Thus  the  London  stock-jobbers  in 
the  days  of  the  French  wars  had  private 
messengers  and  carrier  pigeons  to  bring  them 
news.  In  accordance  with  these  reports,  the 
insiders  would  first  buy  or  sell  the  funds  and 
then  publish  the  report,  and  sell  what  they 
had  bought  to  the  public  or  buy  from  it  what 
they  had  sold.  The  first  Rothschild,  or  rather 
the  founder  of  the  house,  laid  the  foundations 
of  his  immense  fortune  by  getting  early  news 
of  important  events. 

Nowadays  the  principle  is  still  the  same, 
but  the  art  of  anticipation  has  been  made 
much  more  doubtful  and  complicated.  Tele- 
graphs and  telephones  are  open  to  all.  Every 
one  can  watch  from  day  to  day,  and  almost 
from  hour  to  hour,  the  progress  of  wars  and 
revolutions  abroad.  What  everybody  reads 
at  the  same  time  in  his  morning  paper  is  of 


PRICES  OF  SECURITIES  203 

no  particular  use  to  anybody  in  a  speculative 
sense.  Besides,  many  foreign  governments — • 
especially  the  sturdy  borrowers — keep  large 
funds  in  London  and  Paris  for  the  express 
purpose  of  supporting  the  market.  Hence 
in  the  market  for  Government  bonds,  except 
when  insiders  know  in  advance  about  some 
pending  reorganisation  of  the  finances  of 
some  discredited  Government,  big  movements 
are  rare,  and  the  losses  or  profits  they  cause 
are  widely  distributed.  Consequently  suc- 
cessful jobbers  in  the  foreign  market  of  the 
London  Stock  Exchange,  and  in  the  con- 
sol  market,  live  and  flourish  on  their  daily 
turnover  rather  than  upon  occasional  specu- 
lative scoops,  though  no  doubt  their  success 
largely  depends  upon  their  skill  in  acquiring 
a  good  store  of  stocks  when  they  are  cheap 
and  upon  being  short  of  them  when  they  are 
dear. 

When  we  come  to  the  prices  of  railroad  and 
industrial  stocks  the  causes  of  movement  are 
much  more  difficult  to  detect,  and  the  possi- 
bility of  making  large  profits  by  inside  know- 
ledge is  much  greater.  The  newspapers  may 
be  the  conscious  or  unconscious  tools  of  the 
manipulators.  In  new  countries  the  banks 
are  apt  to  be  a  working  part  of  the  speculative 


204          THE  STOCK  EXCHANGE 

machinery.  Thus  in  the  United  States  those 
who  use  great  fortunes  in  finance  frequently 
have  a  controlling  interest  in  a  bank,  or  even 
in  a  chain  of  banks.  What  is  called  "a  com- 
munity of  interests"  may  be  established 
which  will  control  perhaps  important  rail- 
roads and  huge  industrial  corporations,  as 
well  as  a  number  of  banks  and  trust  com- 
panies. The  various  ways  in  which  such  a 
"community"  may  manipulate  a  susceptible 
market  like  Wall  Street  might  be  made  the 
subject  of  a  long  and  fascinating  volume. 
Suppose  that  a  powerful  group  wishes  to 
create  the  appearance,  and  even  temporarily 
the  reality,  of  a  general  trade  depression  in 
the  United  States,  or  at  least  to  exaggerate 
a  depression  which  actually  exists.  This  is 
not  at  all  impossible.  The  controlled  railways 
may  announce  and  partially  carry  out  a 
policy  of  reduced  orders  for  rails,  equipment 
and  repairs.  They  may  ostentatiously  pro- 
claim an  addition  to  the  number  of  idle  cars. 
Well-disciplined  combinations  of  steel  and 
textile  mills  may  declare  a  curtailment  of 
production — the  closing  of  some  mills,  short 
time  in  others,  etc.  Banks  may  suddenly 
become  ultra  conservative;  the  open  accounts 
and  credits  of  small  speculative  customers 


PRICES  OF  SECURITIES          205 

may  be  closed.  In  this  way  a  general  feeling 
of  despondency  can  be  created.  Stocks  will 
fall,  partly  in  consequence  of  the  action  of 
the  banks  causing  a  compulsory  liquidation 
of  speculative  accounts,  partly  through  the 
voluntary  action  of  speculators  and  specula- 
tive investors  who  think  that  trade,  earnings, 
profits  and  dividends  are  likely  to  decline. 
Thus  a  bear  market  is  created.  The  syndi- 
cate or  pool  or  community  of  interests  can 
now  employ  huge  funds  to  advantage  in  pro- 
fitable purchases  of  those  stocks  and  shares 
which  fall  most  and  are  most  responsive  to 
ups  and  downs  of  trade.  Such  a  policy  of 
course  represents  great  difficulties  and  dan- 
gers. It  must  be  carried  out  very  cautiously, 
and  very  secretly,  and  very  honourably  as  be- 
tween the  members.  Leakages  are  disastrous. 
And  if  it  is  too  successful  it  may  create  a 
slump,  or  a  panic,  leading  to  widespread  ruin 
in  which  the  community  of  interests  may  itself 
be  seriously  involved.  For  these  and  other 
technical  reasons,  touched  upon  in  our  chapter 
on  Wall  Street,  the  great  American  operators 
and  manipulators  do  not  very  frequently 
enter  upon  a  concerted  plan  for  colossal  bear 
operations.  Such  a  course  is  unpopular. 
It  offends  public  sentiment.  Rapid  ups  and 


206          THE  STOCK  EXCHANGE 

downs  of  stocks  and  shares  give  a  general 
and  pleasurable  excitement,  appealing  to  the 
speculative  nature  and  traditions  of  the 
people.  But  a  long  bearish  movement,  accom- 
panied by  unemployment,  short  time,  reduced 
earnings  and  profits  and  general  economies 
in  the  style  of  living  and  expenditure,  pro- 
duces or  may  produce  all  manner  of  unpleas- 
ant consequences — economic,  social,  and 
political.  In  fact,  there  is  a  sort  of  moral 
sentiment  against  bearish  operations  on  a 
grand  scale,  which  makes  Wall  Street  (the 
greatest  financial  manipulator  in  the  world) 
the  home  of  the  bull  who  tosses  securities  up 
rather  than  of  the  bear  who  tears  them  down. 
Big  men — the  so-called  giants — often  boast 
that  they  never  operate  on  the  short  side, 
never  play  for  a  fall. 

The  sketch  "bear"  operation  of  a  great 
community  of  interests,  which  has  been  out- 
lined above,  is  therefore  comparatively  rare, 
cautious  and  temporary.  Wall  Street  has  of 
course  to  wait  upon  circumstances.  Some- 
times it  is  caught  by  circumstances.  But 
whether  circumstances  hurt  or  hinder,  it 
must  always  try  to  adjust  itself  to  economic 
and  political  conditions.  A  political  assas- 
sination, a  war,  a  movement  against  the 


PRICES  OF  SECURITIES          207 

trusts,  unfavourable  decisions  in  the  courts, 
an  unexpected  downfall  of  the  favourite  party, 
a  catastrophe  like  the  San  Francisco  earth- 
quake— such  events  as  these  may  produce  an 
irresistible  and  unforeseen  flood  of  liquidation 
against  which  the  strongest  combination  of 
bankers  and  corporation  men  will  struggle 
in  vain.  In  a  general  scramble  produced  by 
some  unexpected  event  insiders  and  outsiders 
are  for  once  on  a  par.  But  in  such  cases 
there  is  more  likely  to  be  a  general  loss  than 
a  general  profit.  For  in  the  history  of  specu- 
lation the  unsuspected  and  unexpected  event 
is  usually  a  calamity.  Real  prosperity  is 
built  up  gradually.  The  Stock  Exchange 
anticipates  and  exaggerates  it,  until  the 
speculative  fabric  has  been  reared  so  high 
above  the  real  foundation  that  a  decline, 
which  may  become  a  crash,  is  seen  to  be 
inevitable.  Generally  speaking,  with  their 
superior  knowledge  of  banking  and  trade 
conditions,  the  insiders  are  able  to  unload 
at  high  levels  just  as  they  have  been  able  to 
load  at  low  levels.  We  may  draw  from 
American  experience  this  general  conclusion, 
that  by  speculating  in  stocks  of  a  national 
size  and  significance  the  outside  public  loses 
far  more  than  it  gains.  It  begins  to  buy 


308          THE  STOCK  EXCHANGE 

when  they  are  dear,  and  it  begins  to  sell 
when  they  are  cheap.  It  knows  nothing  of 
"rigs,"  "corners,"  "pools,"  and  "commu- 
nities of  interest,"  until  long  after  they  are 
dissolved.  But  the  same  person  who  loses 
in  the  general  market  may  gain  in  the  local 
market.  Take,  say,  the  inhabitant  of  a  rising 
provincial  town  in  one  of  the  Western  States. 
He  may  lose  heavily  in  Southern,  or  Erie,  or 
Steels,  or  Union  Pacific.  But  he  may  make 
a  modest  fortune  by  judicious  investments  in 
local  light  railways  (often  called  in  America 
"interurban")  or  industrial  corporations,  or 
trading  companies,  of  which  Wall  Street 
knows  nothing. 

For  the  purposes  of  scientific  analysis  we 
may  rest  our  theory  of  Stock  Exchange 
quotations  upon  a  distinction  between  prices 
and  values.  Prices  are  temporary;  they  shift 
rapidly;  values  are  intrinsic;  they  move 
slowly.  The  price  represents  the  momentary 
market  view  of  a  stock  or  bond — what  you 
can  get  for  it  on  the  exchange  if  you  instruct 
your  broker  to  sell.  The  value  is  the  real 
worth — a  thing  undefinable  and  impossible 
to  ascertain.  If  the  real  value  were  ascer- 
tainable  and  available  to  the  public  then 
price  and  value  would  be  identical,  and  in 


PRICES  OF  SECURITIES  209 

the  case  of  gilt-edged  securities  we  may  say 
that  price  and  value  are  as  nearly  as  possible 
identical.  For  intrinsic  values  do  change, 
like  everything  else  in  this  world.  They  may 
be  said,  in  the  case  of  bonds  and  preference 
stocks,  to  depend  mainly  upon — 

1.  The  rate  of  interest. 

2.  The  margin  of  surplus  earning  power,  or 

revenue. 

In  the  case  of  a  bond  there  is  also,  first,  the 
quality  of  the  security  pledged  as  guarantee 
of  the  principal,  and,  second,  the  date  of 
maturity  or  redemption.  The  first  may 
change,  as  land,  buildings,  machinery,  etc., 
change  hi  value.  The  second  is  always 
changing,  getting  nearer  day  by  day. 

Both  stocks  and  bonds  are,  of  course,  also 
affected  in  their  intrinsic  value  by  the  money 
market  and  by  the  relationship  of  the  supply 
of  capital  seeking  investment  to  the  demand 
for  capital  by  new  flotations.  When  the  new 
demand  exceeds  the  supply  of  new  money 
capital  is  withdrawn  from  old  issues,  and 
values  tend  to  fall.  The  intrinsic  value  of  com- 
mon stock  depends  also  in  a  supreme  degree 
upon  the  actual  efficiency  of  the  corporation 
or  company,  the  condition  of  its  plant,  the 


310          THE  STOCK  EXCHANGE 

skill  of  its  management,  and  the  contentment, 
intelligence  and  industry  of  its  whole  staff. 

Of  course,  all  these  changeful  elements  of 
intrinsic  value  enter  into  prices.  But  as 
prices  sometimes  fluctuate  violently  from 
day  to  day,  and  even  from  hour  to  hour,  it  is 
obvious  that  they  must  also  be  affected  by 
other  causes.  What  these  are,  or  may  be, 
the  reader  will  now  be  able  to  supply  for  him- 
self. But  they  may  be  summed  up  under 
one  or  two  heads: — 

1.  False  rumours,  which  have  got  about 
either  by  design  or  through  the  careless- 
ness   and    mistakes    of    newsmongers. 
Very    often    a    depressing    rumour    is 
merely   a   gross    exaggeration   of   some 
tiny  bit  of  comparatively  trifling  truth. 

2.  Rigs,    pools,    combinations    and    other 
technical  devices  by  which  the  market 
is  either  flooded  with,  or  made  bare  of, 
a  particular  stock  or  groups  of  stock. 

A  competent,  and  by  no  means  unfriendly, 
observer  of  Wall  Street,  where  manipulation 
is  a  fine  art,  thus  describes  the  class  of  pro- 
fessional speculators  "who  make  the  stock 
market  their  life  study  and  business." 

"These  men  base  their  operations,  or  try 
to,  on  values  as  measured  by  income;  but 


PRICES  OF  SECURITIES 

they  study  value  so  as  to  be  able  to  buy  at 
less  than  value,  and  then  they  work  to  sell  at 
as  much  more  than  value  as  they  can  get. 
They  employ  every  means  in  their  power  to 
make  stocks  attractive  to  investors  and  other 
possible  buyers  when  they  are  'long'  and 
want  to  sell,  or  to  make  the  market  appear 
doubtful  or  dangerous  when  they  are  'short' 
and  want  to  buy." 

This  may  help  the  outsider  to  realise  why 
"for  days,  weeks,  and  sometimes  for  months," 
prices  may  represent  manipulation  rather 
than  intrinsic  value.  This  may  also  help  him 
to  see  why  a  clever  man,  who  really  wants 
to  speculate  with  any  probability  of  success, 
must  become  the  member  of  a  great  Stock 
Exchange  or  enter  a  community  of  financial 
interests.  It  is  safe  to  invest,  but  it  is  utterly 
unsafe  to  speculate,  on  intrinsic  values.  The 
insider  who  spends  his  life  in  watching  and 
manipulating  prices  is  often  a  very  poor 
investor,  a  very  poor  judge  of  intrinsic 
values.  The  outsider  surveying  the  world's 
politics  and  finance  and  commerce  with  a 
calm  and  unimpassioned  judgment  may  be, 
and  probably  is,  an  excellent  investor;  but 
if  he  attempts  to  guess  at  prices  by  the  day 
and  the  week  without  inside  knowledge  he  is 
sure  to  come  to  grief. 


CHAPTER  VHI 

THE  CREATION   OF  NEW  DEBT 
AND   CAPITAL 

FOB  many  reasons  a  good  citizen,  as  well 
as  a  good  investor,  should  take  some  trouble 
to  understand  the  methods  by  which  govern- 
ments and  municipalities  and  companies 
borrow,  or  obtain  new  capital.  Anybody 
who  can  criticise  public  finance  is  a  useful 
and  influential  person.  The  investor  who  can 
criticise  prospectuses  and  balance-sheets  for 
himself  is  in  a  strong  position;  for  both  are 
protected  by  an  atmosphere  of  advertisement 
from  the  great  majority  of  newspaper  critics. 
The  city  journalist  is  seldom  allowed  a  free 
hand.  It  is  a  bad  policy  for  both  parties. 
The  reader  of  a  city  page  wants  neither  puff 
nor  blackmail,  but  honest,  discriminating, 
responsible  criticism;  and  if  he  does  not  get 
it  he  may  either  drop  the  newspaper  or  drop 
the  idea  of  subscribing  for  the  issue.  What 
he  usually  finds  in  his  newspaper,  when  a 
212 


CREATION  OF  NEW  DEBT        213 

prospectus  is  advertised,  is  a  colourless  sum- 
mary; and  sometimes  the  prospectus  is  pre- 
ceded a  few  days  before  by  some  article, 
apparently  spontaneous,  but  really  paid  for, 
descanting  upon  the  wonderful  resources  of 
the  region  which  the  new  company  is  going 
to  exploit,  or  the  extraordinary  profits  likely 
to  be  derived  by  the  lucky  person  who  in- 
,  vests,  from  the  very  thing  on  which  the 
prospectus  is  going  to  found  its  appeal.  Im- 
pecunious foreign  governments  and  munici- 
palities often  condescend  to  bait  the  ground 
beforehand  with  carefully  prepared  statistics 
of  their  prosperity.  The  beggar's  rags  excite 
charity,  but  the  investor's  purse  is  not  opened 
by  pity.  When  a  country  is  on  the  verge  of 
a  new  loan  it  is  apt  to  appear  before  its  credi- 
tors in  very  fine  raiment.  Boasting  precedes 
borrowing.  This,  of  course,  does  not  apply 
to  first-class  countries,  whose  debts  are  gilt- 
edged  securities.  They  merely  issue  state- 
ments of  what  money  they  want,  and  leave 
the  public  to  apply  to  the  issuing  house  or 
banking  syndicate  which  has  undertaken  the 
floating  of  the  loan.  This  is  often  the  most 
favourable  opportunity  of  securing  an  abso- 
lutely good  security.  You  get  your  inscribed 
stock  or  bond-to-bearer  for  yourself  without 


214          THE  STOCK  EXCHANGE 

brokerage  fees,  and  it  may  very  likely  go  to 
a  premium,  as  a  government  or  local  author- 
ity generally  issues  at  something  well  below 
the  market  price  for  fear  that  the  loan  should 
prove  unsuccessful  and  injure  the  prestige 
of  the  administration.  The  same  reasoning 
applies  to  colonial  government  securities,  and 
also,  perhaps,  to  the  loans  of  countries  of 
the  second  rank,  so  long  as  the  investor  is 
reasonably  well  informed  about  their  debts 
and  prospects  as  well  as  about  the  technical 
features  of  the  new  loan.  Hence  there  is  a 
very  large  class  of  new  issues  to  which,  in  my 
judgment,  the  following  sweeping  statement 
by  a  very  able  financial  critic  is  not  at  all 
applicable: — 

"We  arrive  inevitably  at  the  conclusion 
that  any  investor,  who  has  no  special  know- 
ledge to  work  on,  commits  a  very  serious 
indiscretion  by  subscribing  for  any  new  issue 
on  his  own  judgment,  based  on  a  perusal  of 
the  prospectus,  and  without  the  counsel  and 
advice  of  his  stockbroker.  It  cannot  be  too 
early  grasped  by  any  one  who  is  in  a  position 
to  invest  money  that  the  judicious  investor 
is  the  investor  who  rejoices  in  a  good  broker, 
trusts  him,  and  takes  his  advice." 

Agreed  that  the  beginning  of  wisdom  in 


CREATION  OF  NEW  DEBT        215 

investment  is  to  contract  a  business  friend- 
ship with  a  good  broker,  who  must  of  course 
be  a  member  of  the  London  Stock  Exchange, 
or  of  some  good  provincial  Exchange,  it  does 
not  follow  that  the  end  of  wisdom  is  to  trust 
him  blindly,  unless,  indeed,  the  broker  is 
abnormally  wise  and  the  client  abnormally 
foolish.  A  person  of  reasonable  aptitude 
and  shrewdness,  who  can  give,  say,  one  per 
cent,  of  his  business  time  to  looking  after  his 
savings,  ought  to  be  able  to  form  an  opinion 
of  his  own;  and  so  long  as  he  contents  him- 
self with  good  securities  yielding  from  3j  to 
4|  per  cent,  he  will  probably  do  best  by  sub- 
scribing from  time  to  time  for  suitable  issues 
of  government  and  other  stocks.  But  when 
securities  are  cheap,  and  nothing  new  offers, 
you  may  simply  instruct  the  branch  manager 
of  your  bank,  who  instructs  his  London 
broker,  to  buy  any  security  you  want.  There 
is  no  loss  in  so  doing,  as  it  is  the  practice 
of  the  London  Stock  Exchange  brokers  to 
divide  their  commission  with  the  bank  from 
which  they  receive  instructions.  But  the 
advice  of  Mr.  Hartley  Withers,  which  I  have 
quoted  and  criticised,  is  sound  enough  if  we 
limit  it  to  the  ordinary  company  prospectus. 
These,  as  he  says,  "should  be  scanned  in  a 


216          THE  STOCK  EXCHANGE 

spirit  of  jaundiced  criticism,  and  with  the 
most  pessimistic  readiness  to  believe  that 
they  are  speciously  alluring  traps  laid  by  some 
designing  financier  to  relieve  the  reader  of 
some  of  his  money."  In  such  cases  the  ad- 
vice of  an  expert,  or  better  still,  of  two,  will 
probably  save  you  from  loss;  for  even  the 
shrewdest  and  most  enlightened  persons  are 
sometimes  caught  by  the  glittering  bait  of 
a  prospectus  which  would  never  have  been 
issued  to  the  public  had  it  really  been  the 
profitable  certainty  it  professes  to  be. 

And  here  we  come  to  a  very  important  con- 
sideration too  often  left  out  of  account  in 
discussions  of  capital  issues.  I  mean  that  in 
Great  Britain,  at  all  events,  there  is  never  any 
difficulty  in  raising  capital  locally  or  privately 
for  the  creation  or  extension  of  any  business 
which  offers  a  reasonable  probability  of  large 
profits.  A  really  good  thing  from  Glasgow, 
or  Yorkshire,  or  Lancashire,  or  the  Midlands, 
seldom  comes  to  London  to  be  floated  on  the 
public.  The  insiders  naturally  keep  it  to 
themselves  and  their  friends.  Sometimes,  no 
doubt,  a  brilliantly  successful  manufacturer  or 
merchant,  who  has  built  up  his  business  and 
wishes  to  retire,  may  think  that  he  will  get 
the  biggest  price  for  the  good-will  by  turning 


CREATION  OF  NEW  DEBT        217 

the  concern  into  a  limited  liability  company. 
But  what  is  good  for  him  may  be  very  bad 
for  the  public.  They  are  invited,  perhaps, 
to  over-capitalise  the  concern.  The  vendor, 
after  selling  his  business  to  the  company, 
may  remain  as  managing  director,  but  his 
interest  is  no  longer  so  keen.  He  is  as  rich 
as  any  one  could  need  to  be  whatever  the  fate 
of  the  company.  He  sold  at  the  zenith  of  his 
fortunes,  and  the  investing  public,  buying,  as 
usual,  at  the  top,  this  time  by  subscription, 
sees  the  profits  declining  year  by  year  from 
"the  average  profits  of  the  last  two  years" 
upon  which  the  prospectus  was  based.  In 
many  of  these  cases  the  debentures  are  a 
fairly  good  security,  especially  if  they  are 
well  protected  by  real  assets.  They  are  also 
protected  by  English  law;  for  companies  of 
this  description  are  usually  incorporated 
under  the  Companies'  Consolidation  Act  of 
1908.  Foreign  and  colonial  companies, 
which  raise  capital  in  England  and  register 
abroad,  are  not  under  our  Companies  Acts. 
The  laws  under  which  they  register  may  give 
poor  protection  to  shareholders,  and  in  any 
case  the  situation  of  English  shareholders 
who  seek  justice  from  a  foreign  or  colonial 
court  is  not  often  enviable.  Besides,  such  a 


218          THE  STOCK  EXCHANGE 

company  may  be  seriously  injured  by  un- 
fair if  not  confiscatory  legislation,  of  which 
there  have  been  recent  instances  in  the  pro- 
vince of  Ontario  and  the  commonwealth  of 
Australia,  to  say  nothing  of  South  American 
republics. 

But  a  very  large  part  of  our  capital  ex- 
ports goes  into  companies  like  Argentine 
railways,  Ceylon  tea,  Malay  rubber  planta- 
tions and  the  like,  which  are  duly  registered 
in  London;  and  in  view  of  the  fact  that  the 
most  profitable  enterprises  at  home  are  never 
open  to  public  subscription  it  would  be  ab- 
surd to  advise  investors  who  have  a  taste  for 
industrials  and  commercial  ventures  to  avoid 
all  foreign  and  colonial  prospectuses. 

For  obviously  in  new  countries  like  Ar- 
gentina, or  old  but  unexploited  countries  like 
China,  where  capital  is  very  scarce,  capital 
has  to  be  attracted  by  the  offer  of  favourable 
terms.  Too  often,  no  doubt,  the  difference 
between  what  the  lender  gives  and  what  the 
creditor  gets  is  monstrously  large.  One  has 
heard  of  a  corrupt  South  American  Gov- 
ernment which  sought  for  money  in  London 
and  got  it  apparently  at  6  per  cent.;  for  the 
loan  was  a  6  per  cent,  loan  issued  to  the 
public  at  par,  or  thereabouts.  But  the 


CREATION  OF  NEW  DEBT        219 

issuing  house  bought  the  loan  at  75  per  cent., 
and  after  the  various  representatives,  negotia- 
tors, and  officials  had  handled  it,  the  purposes 
for  which  the  loan  was  nominally  floated 
probably  did  not  receive  more  than  50  per 
cent,  of  the  sums  so  greedily  supplied  by  our 
simple  and  gullible  public.  Is  it  surprising 
that  a  loan  like  this,  nominally  at  6,  really 
at  12,  per  cent.,  proves  unreproductive,  that 
the  impecunious  province  or  municipality 
after  a  year  or  two  fails  to  pay  the  interest, 
that  there  is  a  grave  scandal,  and  eventually 
a  composition  by  which  the  investors  lose 
perhaps  half  their  subscriptions? 

Much  might  be  said — if  we  had  room  for 
such  a  digression — on  the  economic  signifi- 
cance of  our  capital  exports.  But  that  the  vast 
importance  of  this  subject  may  be  appreciated 
we  shall  here  set  out  in  detail  the  Economist's 
table  of  London's  public  issues  of  capital  for 
the  full  twelve  months  of  1910,  when — as  a 
result  partly  of  great  prosperity,  partly  of 
general  buoyancy  and  speculative  activity, 
partly  of  the  very  special  and  extraordinary 
boom  in  rubber  plantations — an  amazing 
record  was  established  over  the  previous 
figures  for  1909  or  any  similar  period. 

The  British  Government  in   1910  raised 


220 


THE  STOCK  EXCHANGE 


£21,000,000  by  Exchequer  bonds  for  the 
purpose  of  repaying  the  outstanding  portion 
of  the  War  Loan.  This  sum  was  not  really 

ANALYSIS  OF  NEW  CAPITAL  APPLICATIONS. 


Description. 

Total 
1909. 

Total 
1910. 

i 

British.  Government  loans  

£ 

3,840,000 
29,152,600 
22,072,100 
4,899,700 
6,590,800 
10,624,700 
400,000 
11,244,500 
30,766,700 

160,000 
4,340,500 
3,621,600 
3,044,500 
nil 
nil 
4,335,900 
1,578,200 
3,589,400 
5,924,200 
1,918,200 
2,560,100 

7,194,500 
10,510,400 
1,511,300 
976,800 
825,500 
1,025,100 
1,709,500 
1,938,100 
6,001,900 

£ 

24,595,000 
35,631,600 
18,431,000 
1,627,900 
4,308,500 
7,119,400 
3,715,000 
10,096,000 
49,974,700 

562,400 
2,595,700 
4,234,500 
18,343,100 
675,000 
250,000 
6,086,300 
320,400 
5,169,900 
19,143,800 
9,466,400 
5,409,300 

6,160,000 
4,701,000 
368,500 
131,700 
1,503,700 
1,313,200 
4,600,000 
10,789,000 
11,116,100 

Colonial                           "      .... 

British  Municipal  and  County  loans 
Colonial  Corporations 

Foreign                               

British  railways    

Indian  and  Colonial  railways     .    .    . 
Foreign  railways       

Mining  Companies  — 

South  African 

Other  mines  

Exploration  and  financial    

Breweries  and  distilleries     

Merchants,  importers  and  exporters 

Rubber                       

Oil                                          

Iron,  coal,  steel,  and  engineering  .    . 
Electric  lighting,  power,  telegraphs, 
etc           

Motor  traction  and  manufacturing   . 
Gas  and  water                   

Hotels,  theatres,  and  entertainments 
Patents  and  proprietary  articles    .    . 
Docks,  harbours,  and  shipping  .    .    . 

182,356,800 

267,439,100 

CREATION  OF  NEW  DEBT 

new  capital,  but  a  continuation  of  an  old 
public  debt.  The  Colonial  and  Indian  Gov- 
ernments were  as  usual  large  borrowers. 
Foreign  Governments  made  less  heavy  de- 
mands, thanks  to  the  abstinence  of  Russia 
and  Japan.  The  foreign  railway  figure  of 
close  upon  fifty  millions  is  practically  all 
for  North  and  South  America.  The  United 
States  lines  issued  large  amounts  of  bonds, 
while  all  the  Argentine  railways  were  floating 
debentures  or  increasing  their  preference 
capital  in  order  to  meet  the  expenditure 
entailed  by  their  policy  of  rapid  extension. 
The  rubber  and  oil  totals  were  inflated  by  the 
rush  of  prospectuses  at  the  time  of  the  boom, 
and  the  "exploration  and  financial"  figure  was 
also  swollen  by  the  many  finance  companies 
formed  in  connection  with  the  same  outburst 
of  speculation.  The  increase  in  the  banks  and 
insurance  total  is  due  to  the  Banco  Espanol 
del  Rio  de  la  Plata  which  doubled  its 
capital. 

The  foregoing  table  shows  the  destination 
of  the  new  capital  according  to  its  purposes; 
the  table  on  our  next  page  shows  its  destina- 
tion according  to  countries. 

The  United  Kingdom  total  includes  the 
Government  borrowing,  and  the  capitals  of 


222          THE  STOCK  EXCHANGE 

DESTINATION  OF  NEW  CAPITAL. 


Whole  year 
1909. 

Whole  year 
1910. 

United  Kingdom  —  total    .    .    .    . 

£ 
18,681,400 

£ 
60,296,500 

British  Possessions  — 
India  and  Ceylon   

15,336,100 

17  991  600 

South  Africa    

11  291  500 

3  379  100 

Canada     

26  814  200 

36  882  500 

Australasia  
Other  British  Possessions      .    . 

11,380,300 
9,936,100 

13,385,200 
20,739,700 

Total  British  Possessions  .    .    . 
Foreign  Countries  — 
Russia  

74,758,200 
9  472  500 

92,378,100 
3  918  800 

Finland     

2  328  400 

143  000 

Denmark      

487  500 

1  089  000 

Sweden     

881  000 

Norway            

381  100 

50  000 

United  States 

15  905  400 

39  590  100 

Brazil 

9  218  600 

11  813  900 

Argentine 

21  738  100 

22  865  000 

Chili      

4,098,000 

4  684  600 

Mexico      

9,109,600 

5  087  100 

Central  America     

1,591,700 

35  000 

Other  South  American  Republics 
China 

2,615,800 
740  000 

3,141,500 
1  610  100 

Japan 

4  723  600 

Austria-Hungary    

f  4  098  000 

Bulgaria   

3  603  600 

Greece  

1  572  100 

France      .            

900  000 

Turkey 

• 

1  431  000 

Germany  and  Possessions     .    . 
Dutch  East  Indies 

>  5,625,900* 

]       794,000 
4  382  900 

Cuba 

1  916  200 

Philippine  Islands 

403  900 

Other  foreign  countries      .    .    . 

.  1,634,700 

Total  foreign  countries  .... 

88,917,200 

114,764,500 

Total  for  whole  year  

182,356,800 

267,439,100 

*  Not  separately  distinguished  until  1910. 


CREATION  OF  NEW  DEBT 

most  of  the  investment  companies  formed  to 
conduct  or  finance  operations  on  the  Stock 
Exchange.  The  British  Possessions  figure  is 
nearly  £18,000,000  above  1909,  owing  to  the 
demands  of  Canada,  and  the  rush  of  money  to 
the  Straits  Settlements  for  rubber  cultivation. 
The  only  other  point  requiring  mention  is 
the  increased  flow  of  capital  from  England 
to  Europe,  which  has  mostly  been  applied 
to  developing  the  oilfields  of  Austria  and 
Bulgaria. 

The  promotion  of  a  new  company  in  Lon- 
don has  been  described  with  vivacity  and 
veracity  by  Mr.  Hartley  Withers,  in  his  recent 
book  on  Stocks  and  Shares;  the  problems  and 
operations  of  American  promoters  in  the 
flotation  of  new  undertakings  and  the  com- 
bining of  old  ones  into  new  trusts  and  cor- 
porations have  been  expounded  critically  and 
exhaustively  by  Mr.  Edward  S.  Meade,  in  his 
clever  study  of  Corporation  Finance.  In  new 
countries  like  Canada,  Argentina  or  Aus- 
tralia, and  in  countries  like  the  United  States 
which  are  still  filling  up  and  present  ever  fresh 
openings  for  the  profitable  employment  of  new 
capital,  the  promoter  plays  an  all-important 
part  in  economic  developments.  The  function 
has  been  so  much  abused  that  the  name  is 


224          THE  STOCK  EXCHANGE 

in  evil  odour.  But  an  honest  promoter,  with 
a  good  eye  for  a  good  opening  and  the  skill 
and  credit  to  utilise  his  opportunity,  is  really 
a  public  benefactor  and  deserves  to  be  well 
rewarded.  If  he  is  unscrupulous,  floats  bad 
propositions,  and  takes  more  than  his  share, 
he  is  a  public  nuisance,  and  probably  in  the 
long  run  will  suffer  the  rogue's  fate.  For, 
happily,  honesty  is  the  best  policy;  and  it 
pays  particularly  well  in  walks  where  dis- 
honesty is  particularly  prevalent. 

From  the  standpoint  of  general  utility 
there  is  all  the  difference  between  the  pro- 
moter of  a  real  new  enterprise  and  the  pro- 
moter of  a  trust  or  combination.  The  former 
is  calculated  to  increase  wealth;  the  latter  is 
rather  likely  to  diminish  it.  The  former 
is  good  for  employment,  the  latter  is  likely 
to  reduce  it.  The  former  increases  the 
good  things  of  the  world  and  multiplies  the 
conveniences  of  life.  The  latter  aims  at 
restricting  them  and  so  increasing  their  cost. 
One  is  addition,  the  other  subtraction.  One 
enlarges  the  world's  resources  and  enriches 
the  consumer  by  giving  him  something  new; 
the  other  exploits  him  by  establishing  a 
monopoly  and  so  forcing  him  to  pay  higher 
prices  or  to  pay  the  old  prices  for  inferior 


CREATION  OF  NEW  DEBT        225 

articles.  The  idea  that  union  means  strength 
and  that  great  size  means  great  profits  in 
industrial  combinations  has  been  circulated 
and  believed  for  a  generation.  But  there 
are  signs  that  the  cult  is  dying  down.  A 
strict  combination  of  all  the  manufacturing 
concerns  in  a  protective  country  may  enable 
them  to  extract  every  possible  penny  of  the 
protective  duty  out  of  the  consumers.  That 
they  should  unite  for  this  purpose  is  the  most 
natural  and  certain  thing  hi  the  world,  and 
to  attain  the  end  a  promoter  is  often  needed. 
The  reason  why  they  so  often  have  to  go  to 
Wall  Street,  or  to  some  similar  financial 
centre,  is  that  they  cannot  all  agree  how  the 
capital  shall  be  watered  and  how  the  shares 
shall  be  subdivided.  Very  often,  indeed,  the 
scheme  or  proposition  is  made  by  a  promoter, 
and  the  individual  manufacturers  are  in- 
duced to  come  in  by  tempting  offers,  or 
threats  of  ruin  if  they  stay  out.  From  the 
investor's  point  of  view,  the  history  of  these 
unions,  associations,  trusts,  or  combinations 
has  been  generally  disappointing.  Many  of 
them  are  waterlogged  from  the  outset.  In 
a  free  trade  country  they  cannot  raise  prices 
on  account  of  foreign  competition.  In  a 
protected  country  prices  have  already  been 


226          THE  STOCK  EXCHANGE 

raised,  and  what  they  gain  by  raising  them 
higher  they  may  lose  by  diminished  con- 
sumption. The  keenness  and  energy  of 
the  individual  employer  is  lost  by  centra- 
lisation. Much  is  often  wasted  at  the  outset 
by  buying  worthless  mills  with  antiquated 
plant,  merely  to  close  them  down.  Then 
other  independents  crop  up  who  have  also 
to  be  bought  up  if  there  are  funds  for  the 
purpose. 

The  absolute  or  relative  failure  of  nearly 
all  the  English  combines  which  have  been 
floated  on  the  market  is  too  well  known 
to  be  insisted  upon.  In  the  United  States 
the  idea  of  converting  every  branch  of  indus- 
try into  a  single  trust — a  consolidation  of 
all  competing  plants — with  a  view  to  extract- 
ing monopoly  profits  has  been  carried  further 
than  anywhere  else.  Under  the  shelter  of 
the  tariff  huge  concerns  have  grown  up;  by 
the  zeal  of  the  promoter  they  have  been 
enlarged  into  million  and  billion  dollar  trusts. 
In  a  sense,  all  the  competitors  are  promoters, 
and  in  this  sense  the  transaction  has  usually 
been  very  profitable;  for  the  watering  of 
capital  merely  means  that  the  promoters 
have  received  from  the  public  far  more  money 
than  the  consolidated  concerns  are  worth. 


CREATION  OF  NEW  DEBT        227 

In  some  celebrated  cases,  after  a  series  of 
years  in  which  the  common  stock  has  received 
no  dividends  and  the  preferential  sharehold- 
ers have  been  only  irregularly  paid,  a  good 
deal  of  water  has  been  squeezed  out  and 
fortunes  have  been  made  by  large  operators 
who  bought  stock  in  years  of  depression.  But 
I  am  inclined  to  think  that  if  all  the  industrial 
combinations  promoted  and  marketed  in  the 
United  States  and  listed  in  New  York  or 
other  American  Stock  Exchanges  could  be 
examined  historically  from  the  standpoint  of 
the  original  investors  and  subscribers  (leaving 
out  those  who  received  some  part  of  the  pro- 
motion profits  in  stock)  the  record  would 
prove  disappointing. 

The  promoter  who  is  consolidating  com- 
petitive interests  into  a  trust  or  association 
may  appeal  for  support  on  various  grounds:— 

1.  Competition  will  be  eliminated  and  so 

prices  can  be  raised  and  controlled. 
In  times  of  depression  prices  can  be 
maintained  by  curtailing  output  and 
closing  factories. 

2.  A   centralised   management   can   effect 

the  economies  that  belong  to  large 
operations.  Superfluous  persons  can 


«28          THE  STOCK  EXCHANGE 

be  dismissed  regardless  of  local 
claims. 

3.  The  size  of  the  concern  should  enable 

it  to  get  very  favourable  terms  from 
railways  and  from  producers.  A  large 
buyer  can  afford  also  to  deal  sternly 
with  small  customers  who  seek  to 
cancel  orders  or  "readjust  contracts" 
when  trade  becomes  bad. 

4.  A    large    combination    is    in    a    better 

position  to  resist  the  demands  of 
organised  labour. 

All  these  propositions  are  plausible,  but  all 
contain  a  mixture  of  truth  and  error.  To  the 
last  one,  for  instance,  it  may  be  urged  that 
just  as  it  is  easier  to  deal  with  organised 
labour  than  with  undisciplined  labour,  so 
labour  leaders  can  extract  terms  more  easily 
from  the  executive  of  a  federation  than  from 
individual  employers.  Moreover,  if  a  com- 
bination in  restraint  of  trade  deals  harshly 
with  labour  it  becomes  unpopular  and  may 
become  the  object  of  legislative  or  adminis- 
trative attack.  The  economy  of  large  opera- 
tions is  often  more  than  off-set  by  central 
mismanagement.  The  directors  of  a  big  trust 
may  be  directors  of  banks  and  many  other 


CREATION  OF  NEW  DEBT        229 

concerns.  Their  income  may  be  derived 
mainly  from  financial  operations.  Their 
interest  in,  and  the  time  they  can  spare  to, 
the  trust  may  be,  and  probably  is,  very  small. 
In  any  case,  half-a-dozen  men  sitting  in  a 
central  office  and  issuing  orders  to  local 
factories  of  which  they  have  no  practical  ex- 
perience are  usually  a  poor  substitute  for  the 
individual  manager  who  has  made  the  busi- 
ness by  his  own  exertions  and  is  now  enjoying 
the  capital  sum  for  which  he  has  exchanged 
his  concern.  The  ingenuity  of  the  corporation 
lawyer  who  frames  the  trust  will  overcome  all 
the  technical  difficulties,  but  it  is  generally 
found  that  a  great  concern  cannot  be  fairly 
capitalised.  The  proper  basis  for  determining 
the  value  of  all  the  plants  together  would  be 
the  earning  power  of  each  individual  plant 
averaged  over  a  series  of  years.  But  a  little 
reflection  will  show  that  when  it  comes  to 
capitalisation  all  will  expect  to  get  more  than 
their  concerns  are  really  worth,  and  all  will 
succeed  in  various  degrees.  Very  often  the 
trust  promoter  is  forced  to  "fight  for  his  own 
hand,"  as  one  of  them  expressed  it,  through- 
out a  long  and  complicated  course  of  dip- 
lomacy, associating  with  the  stronger  mem- 
bers of  the  trade  and  squeezing  others.  He 


230          THE  STOCK  EXCHANGE 

has  to  keep  his  eye,  of  course,  on  the  public, 
and  in  most  cases,  as  Mr.  Meade  puts  it,  his 
business  is  "to  buy  plants  from  their  owners 
at  one  price  and  sell  them  to  the  investor  at  a 
higher  price."  When,  by  alliance,  persuasion, 
and  coercion,  the  promoter  has  "assembled 
his  proposition,"  he  will  approach  bankers. 
In  important  cases  a  syndicate  will  be  formed 
and  a  financial  plan  devised,  consisting  usu- 
ally of  bonds,  preference  and  common  stock. 
In  the  case  of  a  consolidation,  bonds  are  usu- 
ally issued  in  part  payment  to  the  individual 
concerns.  Thus,  when  the  Steel  Trust  was 
floated  by  Messrs.  J.  P.  Morgan,  Mr.  Carne- 
gie and  his  associates  were  in  such  a  command- 
ing position  that  they  were  able  to  demand 
successfully  no  less  than  three  hundred  million 
dollars  of  first  mortgage  bonds.  Preference 
stocks  also  play  a  very  important  part.  Thus 
large  industrial  companies  in  the  United 
States  (mostly  consolidations)  supply  at  the 
present  time  over  one  hundred  issues  of  pre- 
ferred stocks. 

When  a  company  is  floated  to  develop  some 
new  traffic  or  industry,  the  promoter  is  often 
an  engineer  with  banking  connections.  The 
promoting  engineer  is  defined  by  Mr.  Meade 
as  "a  firm  or  corporation  engaged  in  the  busi- 
ness of  building  trolley  roads,  power  plants, 


CREATION  OF  NEW  DEBT        231 

railroads;  doing  all  kinds  of  engineering  and 
construction  work  within  a  certain  field." 
Such  firms,  especially  in  London  and  other 
great  money  centres,  will  often  have  a  large 
capital  as  well  as  a  big  credit.  They  will 
possess  a  skilled  organisation  of  engineers, 
chemists,  lawyers,  and  accountants.  British, 
German,  and  French  engineering  and  promot- 
ing firms  of  this  type  are  prepared  to  under- 
take contracts  and  promote  enterprises  in  all 
parts  of  the  world.  There  are  great  advan- 
tages in  an  engineering  contractor  being  as- 
sociated with  and  interested  in  the  success  of  a 
great  engineering  enterprise.  But  it  is  not  de- 
sirable that  after  the  company  has  been 
formed  it  should  be  controlled  by  its  contrac- 
tor, because  the  contractor  is  always  inter- 
ested in  construction.  If,  for  example,  the 
dominating  interest  in  a  railroad  company  is 
the  contractor,  he  is  apt  to  be  always  extending 
the  line,  regardless  of  shareholders'  interests, 
in  order  to  provide  his  own  firm  with  work. 

Small  flotations  usually  originate  with  local 
men,  especially  landowners  who  desire  to  sell 
their  land  on  favourable  terms  for  coal,  oil,  or 
similar  propositions. 

Among  the  preparations  made  for  the  float- 
ing of  a  new  company,  or  for  an  issue  of  new 


232          THE  STOCK  EXCHANGE 

capital  by  an  old  one,  none  is  more  important 
than  the  underwriting  of  shares.  In  few 
cases  can  a  promoter  afford  to  appeal  to  the 
public  until  the  sale  of  his  wares  has  been  thus 
guaranteed.  By  acting  as  underwriters  for 
new  issues,  City  capitalists  often  make  very 
large  profits,  though  from  time  to  time,  when 
the  public  fails  to  bite,  they  stand  to  lose. 
Thus  when  a  new  issue  is  unsuccessful,  or 
partially  unsuccessful,  it  is  announced  that 
the  underwriters  have  been  left  with,  say, 
75  per  cent,  on  their  hands.  A  few  years  ago 
the  underwriters  in  ordinary  cases  merely 
engaged  to  take  any  shares  which  might  not 
be  subscribed  by  the  public,  so  that  such  a 
result  would  have  been  thought  very  disap- 
pointing. But  now  it  is  becoming  more  and 
more  common  for  the  issuers  to  stipulate  that 
the  underwriters  shall  actually  purchase  at 
the  price  named  whatever  quantity  of  shares 
they  may  have  underwritten;  so  that, 
whereas  the  old  form  of  an  underwriting  con- 
tract merely  obliged  the  underwriters  to  take 
a  fixed  amount  or  a  fixed  proportion  condition- 
ally, the  new  form  obliges  them  to  take  it 
absolutely.  In  other  words,  there  is  a  "firm," 
as  distinct  from  a  hypothetical  undertaking. 
The  underwriters  are  allotted  then-  shares 


CREATION  OF  NEW  DEBT        233 

and  actually  receive  them.  But  whether 
they  underwrite  "firm"  or  no,  the  vast 
majority  of  Stock  Exchange  men  who  engage 
in  this  business  buy  the  new  issue  for  the 
purpose  of  selling  it  at  a  profit  to  their  clients. 
.And  this  they  can  usually  do,  if  it  is  at  all 
promising;  for  even  if,  after  the  stock  is 
issued,  it  stands  at  a  discount  of  2  per  cent., 
yet,  if  it  has  been  underwritten  at  a  discount 
of  5  per  cent.,  an  underwriting  broker  or 
banker  can  still  dispose  of  it  gradually  to  his 
clients  on  very  satisfactory  terms.  But  be- 
sides the  underwriters  who  underwrite  in 
order  to  sell  as  quickly  as  possible — the  specu- 
lative underwriters — there  is  also  now  a  very 
large  and  important  class  of  underwriters, 
who  underwrite  good  securities  with  a  view 
to  holding  them  as  investments.  Conspicuous 
among  these  are  the  insurance  companies, 
which  have  grown  to  be  very  great  and  im- 
portant factors  in  the  capital  and  investment 
market.  For  short  dated  issues  such  as  the 
short  term  notes,  with  which  London  is  often 
flooded  by  American  railroads  and  industrial 
corporations,  and  even  by  American  cities, 
the  banks  compete  with  the  insurance  com- 
panies. These  short  term  notes  "  mature  "- 
i.  e.  are  repaid — at  various  dates,  and  an  in- 


234          THE  STOCK  EXCHANGE 

surance  company  often  likes  to  have  a  security 
of  this  sort,  which  will  pay  good  interest  and 
mature,  or  fall  due,  in  a  year  when  an  extra 
amount  of  revenue  will  be  required  for  bo- 
nuses. Banks,  again,  when  money  is  cheap 
and  plentiful,  find  that  by  purchasing  such 
notes  they  can  get  a  run  of  comparatively 
high  interest  for  a  few  months.  But  an  in- 
surance company  does  not  need  to  keep  its 
capital  liquid  in  the  same  way  as  a  bank.  It 
is  a  great  investor.  In  fact,  in  the  case  of  the 
biggest  companies  the  investment  department 
is  becoming  as  important  as  the  insurance  de- 
partment. By  underwriting  good  issues  an 
insurance  manager  does  better,  as  a  rule,  than 
by  buying  securities  in  the  open  market;  for 
in  this  way  he  gets  them  well  below  the  market 
price.  That  part  of  a  new  issue,  therefore, 
which  is  bought  by  an  insurance  company  is 
taken  permanently  off  the  market  and  stowed 
away.  And  it  will  be  held  firmly  for  the  sake 
of  the  interest,  without  much  regard  to  its 
price  fluctuations,  for  an  indefinite  period,  un- 
less (as  sometimes  happens)  some  great  con- 
flagration like  the  San  Francisco  disaster 
forces  a  company  to  realise  part  of  its  holdings. 
Hence  it  often  happens  that,  when  a  new  issue 
has  to  be  taken  very  largely  by  the  underwrit- 


CREATION  OF  NEW  DEBT        235 

ers,  it  is  better  placed  and  more  firmly  held 
than  when  it  is  over-subscribed  by  the  public; 
for  the  outsiders  who  subscribe  for  new  issues 
are  often  "stags,"  who  apply  for  far  more 
than  they  could  really  buy  in  the  hope  of  be- 
ing able  to  sell  shortly  afterwards  at  a  pre- 
mium. In  that  case  the  premium  rapidly  runs 
off  under  a  fire  of  sales,  and  the  stock  may 
stand  for  a  long  time  at  a  discount. 

There  is,  of  course,  a  vast  difference  be- 
tween good  underwriters  and  bad  ones.  Dur- 
ing the  rubber  and  oil  boom,  in  the  early 
months  of  1910,  there  was  a  great  rush  of  pop- 
ular issues — many  of  which  afterwards  proved 
to  be  bubble  companies.  In  that  case,  as  Mr. 
Withers  recently  pointed  out  in  a  valuable 
article  (Investor's  Monthly  Manual,  Oct.  1910) 
underwriting  is  "a  simple  and  easy  method 
of  putting  a  nice  cheque  into  one's  pocket  by 
merely  undertaking  to  do  something  which 
one  is  most  unlikely  to  be  asked  to  do." 
Most  interesting  stories,  he  adds,  are  told  of 
profits  so  made  and  of  resultant  banquets  by 
more  or  less  impecunious  gentlemen  in  the 
West  End,  who,  having  a  sort  of  semi-con- 
nection with  the  City,  acquired  the  privilege 
of  underwriting,  on  generous  terms,  blocks  of 
shares  in  rubber  or  oil  companies  for  which 


236          THE  STOCK  EXCHANGE 

they  could  not  possibly  have  paid  had  they 
been  called  upon  to  do  so.  "This  sort  of  un- 
derwriter is  merely  an  impudent  fraud,  like 
anybody  else  who  takes  money  in  return  for 
a  promise  that  he  could  not  keep.  Luckily, 
he  can  only  make  his  appearance  when  the 
public  is  demented  by  one  of  its  periodical 
speculative  manias."  Of  course  the  weak 
underwriters  of  this  class  are  often  caught, 
especially  towards  the  end  of  a  boom  when 
the  public  is  glutted.  Many  poor  City  clerks, 
as  well  as  smart  West  Enders,  were  left  at  the 
end  of  the  rubber  boom  with  quantities  of 
unsaleable  scrip,  liable  to  heavy  calls  which 
they  could  not  meet.  A  respectable  new  ven- 
ture will  never  make  underwriting  arrange- 
ments of  this  sort.  It  may  perhaps  be  legiti- 
mate, where  the  risk  is  high,  for  the  under- 
writers' commission  to  run  up  to  10  per  cent.; 
but  where  it  runs  up  to  25  per  cent,  the  sub- 
scribing public — which  knows  nothing  of  all 
this — is  obviously  being  swindled.  In  any 
case,  whenever  the  underwriting  arrange- 
ments, made  behind  the  scenes,  do  not  ensure 
that  the  shares  underwritten  can  be  taken  up 
and  paid  for — in  short,  whenever  the  under- 
writers are  not  men  of  substance  and  credit — 
the  subscribing  public  is  shamefully  wronged. 


CREATION  OF  NEW  DEBT        237 

It  would  be  greatly  to  the  advantage  of  the 
City  if  these  scandals  could  be  made  im- 
possible by  legislation. 

There  are,  therefore,  two  distinct  types  of 
underwriters  shading  off  into  one  another: — • 
(1)  The  speculative  underwriter,  who  under- 
writes to  sell;  and  (2)  the  investing  under- 
writer, who  underwrites  as  a  real  purchaser, 
to  obtain  and  hold  securities.  Both  kinds 
do  the  work  for  a  commission  by  means  of 
which  they  obtain  the  shares  at  anything 
from  1  to  25  per  cent,  (or  even  more)  below 
the  nominal  price.  The  solid  underwriter  is 
of  course  mainly  concerned  with  good  public 
loans,  home,  foreign,  and  colonial,  or  bond 
issues  of  railways  and  industrial  companies, 
whereon  the  commission  or  discount  is  not 
very  large.  But  it  is  one  of  the  weakest 
points  of  a  prospectus  that  it  does  not  dis- 
close either  the  price  at  which  the  issue  has 
been  taken  by  the  issuing  houses,  or  the  com- 
mission which  has  been  paid  to  underwriters. 
Information  of  this  sort,  however,  generally 
leaks  out  in  the  City,  and  is  conveyed  by  the 
best  informed  City  editors  to  the  public. 

It  is  generally  provided  in  the  prospectus 
of  a  new  issue,  whether  by  a  public  authority 
or  by  a  private  company,  that  a  subscriber 


238          THE  STOCK  EXCHANGE 

shall  pay  by  instalments  spread  over  several 
months.  This  method,  which  is  now  practi- 
cally universal,  was  introduced  by  the  British 
Government  during  the  eighteenth  century, 
and  in  some  cases  a  system  of  underwriting 
was  adopted  in  those  early  days  of  public 
borrowing  either  in  order  to  enrich  favoured 
individuals  or  for  the  more  legitimate  purpose 
of  ensuring  success.  In  the  tenth  edition  of 
Mortimer's  Every  Man  his  own  Broker,  issued 
in  1775,  the  system  then  in  vogue  is  described 
as  follows:  — 

"When  the  Parliament  has  voted  these 
supplies,  and  resolved  on  the  ways  and  means 
of  raising  them,  a  subscription  is  set  on  foot, 
and  is  either  open  to  the  public,  in  which  case 
every  responsible  person  is  at  liberty  to  apply, 
by  a  proper  letter  to  the  right  honourable  the 
Lords  Commissioners  of  the  Treasury,  for 
leave  to  be  admitted  to  be  a  contributor, 
naming  in  his  letter  the  sum  he  desires  to 
contribute;  or  else  it  is  private,  that  is  to 
say,  a  certain  number  of  persons  of  fortune 
have  agreed  to  be  answerable  for  the  whole 
sum  to  be  subscribed;  and  have  made  the 
required  deposit.  In  this  case,  the  only  step 
to  be  taken,  by  those  who  are  not  of  the  num- 
ber just  mentioned,  is  to  apply  to  them  for 


CREATION  OF  NEW  DEBT        239 

such  part  of  the  subscription  as  you  want, 
which  if  you  are  a  particular  friend,  they  will, 
perhaps,  spare  you  without  any  premium, 
or  for  a  very  small  one;  for  it  is  not  to  be 
presumed,  that  any  inconsiderable  number 
of  men,  who  have  subscribed  for  the  whole 
sum  to  be  raised,  intend,  or  can  keep  it,  but 
that  they  propose  to  include  in  their  subscrip- 
tion, all  their  friends  and  acquaintances. 
Sometimes  the  subscription  lies  open  to  the 
public  at  the  bank  or  at  the  Exchequer,  and 
then  every  person  is  allowed  to  subscribe  what 
he  thinks  proper;  and  if,  upon  casting  up 
the  whole,  there  is  a  surplus  subscribed,  as 
has  generally  been  the  case,  the  sum  each 
subscriber  has  subscribed,  is  reduced  in  a 
just  proportion,  so  as  to  make  in  the  whole, 
the  sum  granted  by  Parliament. 

"As  soon  as  conveniently  may  be,  after 
the  subscription  is  closed,  receipts  are  made 
out,  and  delivered  to  the  subscribers,  for  the 
several  sums  by  them  subscribed.  .  .  .  The 
first  deposit  is  generally  of  fifteen  per  cent., 
and  is  made  on  or  about  the  time  of  sub- 
scribing; the  second  is  about  a  month  after, 
and  so  on  till  the  whole  is  paid  in,  which  is 
generally  in  October;  each  monthly  payment 
being  either  ten  or  fifteen  per  cent.  Those, 


240          THE  STOCK  EXCHANGE 

who  chuse  to  pay  the  whole  sum  before  the 
appointed  day  of  payment,  are  allowed  three 
per  cent,  from  the  time  of  such  payment  to 
October.  The  subscription  receipts  thus  paid 
in  full,  are  called  in  the  Alley,  Heavy-Horse, 
because  the  gentlemen  of  the  Alley  can  make 
greater  advantage  than  three  per  cent,  by  the 
Light-Horse,  and  therefore  they  will  not  give 
so  good  a  price  for  the  Heavy;  nay,  some  of 
them  will  have  absolutely  nothing  to  do  with 
it,  for  this  reason,  that  they  can  buy  a  thou- 
sand pound,  Light-Horse  (with  one  payment 
made)  for  the  same  money  as  one  hundred 
pounds  heavy,  and  by  buying  for  the  Light, 
they  have  an  opportunity  of  sporting  with, 
and  gaining  a  profit  on,  a  nominal  thousand, 
for  the  same  money  that  it  would  cost  to  buy 
an  hundred  Heavy.  Light-Horse,  therefore, 
is  the  commodity  to  jobb  with." 

The  advantage  of  "Light-Horse"  to  specu- 
lators, of  course,  was  that  a  small  amount  of 
cash  would  buy  a  large  amount  of  paper  value. 
After  the  first  payment,  for  example,  a  person 
could  buy  for  £75  a  receipt  for  £500  scrip, 
and  for  much  less  if,  according  to  custom, 
the  value  of  the  lottery  ticket  were  deducted. 
No  doubt,  many  purchasers  of  Light-Horse 
were  persons  of  small  capital  who  bought  for 


CREATION  OF  NEW  DEBT       241 

the  rise  and  were  anxious  to  sell  or  get  out  as 
soon  as  possible.  When  a  cheap  and  tempt- 
ing prospectus  appears  nowadays  it  is  always 
over-subscribed  in  the  same  way  by  small 
operators  who  sell  out  the  moment  a  good 
premium  is  established.  But  sometimes  they 
are  disappointed.  The  issue  does  not  go  to  a 
premium.  In  that  case,  writes  Mortimer,  the 
disappointed  gambler  in  Light-Horse  scrip 
"may  put  it  out  to  nurse,  that  is,  deposit  it 
in  the  hands  of  some  moneyed  man,  who  for 
a  proper  consideration  will  pay  upon  it  and 
keep  it  as  his  security  till  the  proprietor  has 
an  opportunity  of  selling  it  to  advantage." 

Those  acquainted  with  the  problems  of 
modern  banking,  and  the  competition  be- 
tween commerce  and  the  Stock  Exchange  for 
accommodation,  will  be  interested  to  know 
that  150  years  ago  "a  branch  of  business 
perhaps  as  considerable  as  any  amongst  the 
bankers  near  the  Alley"  was  the  taking  in 
of  various  kinds  of  paper,  such  as  scrip,  long 
annuities,  etc.,  in  pawn.  At  one  time,  in- 
deed, the  pawning  of  scrip  became  so  large 
and  profitable  a  business  that  the  bankers 
and  bill  brokers  of  Lombard  Street  "openly 
refused  to  discount  bills,  to  the  great  detri- 
ment of  the  commercial  interest." 


CHAPTER  IX 

CAUTIONS  AND   PRECAUTIONS 

IN  the  preceding  chapters  Stock  Exchange 
securities  have  been  discussed  principally 
from  the  standpoints  of  London  and  New 
York.  In  some  respects  Paris  and  Berlin  are 
equally  interesting,  especially  in  their  banking 
ramifications  and  in  the  alliance — dangerous 
to  both — which  public  diplomacy  has  con- 
tracted with  high  finance.  But  if  the  financial 
panorama  of  the  old  world  and  the  new  had 
to  be  studied  from  two  centres  only,  there  is 
no  doubt  that  Lombard  Street  and  Wall 
Street  should  be  chosen.  The  city  of  London, 
with  all  its  vast  and  delicate  financial  organi- 
sation clustering  round  the  Bank  and  the 
Stock  Exchange  and  Lloyds,  directing,  con- 
trolling, guiding  or  influencing  rates  of  in- 
terest and  discount,  rates  of  exchange  and 
rates  of  insurance  in  all  parts  of  the  world,  is 
unique  as  a  market  for  commodities,  a 
market  for  stocks,  and  a  market  for  capital. 
Here  all  these  things  are  bought  and  sold  on 

242 


CAUTIONS  AND  PRECAUTIONS    243 

an  international  scale.  It  would  be  a  mis- 
take to  say  that  London  is  not  speculative. 
For  one  thing  the  City  entertains  too  many 
canny  but  venturesome  Scots  to  allow  such 
a  charge  to  be  brought.  But  there  is  so 
much  old  wealth,  such  long  traditions  of 
caution  and  stability,  so  keen  a  sense  of  re- 
sponsibility among  those  in  command  of  the 
leading  banks  and  houses,  that  London,  with 
its  unequalled  annual  surplus  or  overflow  of 
capital  for  export,  should  be  reckoned  rather 
as  the  capital  city  of  banking  and  invest- 
ment than  as  the  chosen  home  of  speculation. 
That  second  title  belongs  of  right  to  New 
York.  It  borrows  money  from  across  the 
Atlantic  in  order  to  lend  it  to  the  West.  Its 
Stock  Exchange  list  is  reprinted  hourly  by 
the  tape  machine  from  New  Orleans  to  San 
Francisco,  and  from  San  Francisco  to  Mon- 
treal. Over  ninety  millions  of  people  are 
animated  by  the  palpitations  of  Wall  Street. 
This  ferment  of  speculation  over  so  vast  a 
continent  has  its  good  and  its  evil  sides.  At 
times  it  becomes  an  international  danger, 
and  ends  in  a  panic  which  sweeps  away 
thousands  of  apparently  flourishing  concerns, 
scattering  gloom  over  the  trade  and  securi- 
ties of  the  whole  world.  But  the  rapid  de- 


244          THE  STOCK  EXCHANGE 

velopment  of  material  resources,  mining,  agri- 
culture, manufactures,  transportation,  is  of 
necessity  associated  with  speculation.  For 
speculation  in  the  best  sense  is  the  investment 
of  capital  and  the  use  of  credit  to  finance 
enterprises  which  promise  to  yield  handsome 
profits.  But  for  a  verdant  and  evergreen 
faith,  salted  with  the  love  of  risk  and  adven- 
ture for  their  own  sakes,  how  could  mountains 
be  bored  and  waters  bridged?  If  there  were 
not  superstition  there  could  be  no  religion, 
if  there  were  no  bad  speculations  there  would 
be  no  good  investments,  if  there  were  no  wild 
ventures  there  would  be  no  brilliantly  success- 
ful enterprises;  the  same  sort  of  sentiment 
which  gave  Dr.  Cook  a  temporary  notoriety 
invested  Nansen  with  permanent  fame.  New 
York,  then,  must  be  valued  fairly,  not  as  a 
sort  of  gambling  hell,  but  as  a  nerve  centre 
of  North  American  enterprise.  It  is  the 
ultimate  temple  and  court  of  high  finance 
before  which  nearly  all  important  local 
propositions  for  large  enterprises  through- 
out the  States  of  the  Union,  and  often  far 
beyond  its  northern  and  southern  bounda- 
ries, ultimately  bow  the  knee. 

Nevertheless,  those  cautions  and  precau- 
tions which  it  has  been  our  purpose  to  throw 


CAUTIONS  AND  PRECAUTIONS    245 

in  the  path  of  rash  investment,  are  by  no 
means  to  be  slighted  merely  because  material 
enterprise,  enriching  the  world  and  spreading 
the  comforts  of  civilisation  through  hitherto 
inhospitable  and  barren  regions,  is  necessarily 
based  upon  the  credit  provided  by  the  banker 
and  the  money  provided  by  the  speculator. 
Those  who  have  saved  money  by  their  own 
enterprise  and  thrift  are  fools  if  they  lend  it 
gladly  on  promises  of  romantic  profits  in 
distant  regions.  It  is  a  good  principle  to 
remember  that  if  an  enterprise  is  really  very 
promising,  money  will  be  found  somehow 
locally,  by  those  who  have  seen  it  with  their 
own  eyes.  When  doubtful  propositions  have 
to  be  floated  the  promoters  always  calculate 
that  distance  will  lend  enchantment  to  the 
view.  They  try  to  raise  their  money  among 
people  who  can  only  read  their  prospectus. 

Of  course  there  are  not  many  hard  and  fast 
rules  in  business  life;  but  there  are  some  in 
connection  with  investment  with  which  the 
reader  of  these  pages  will  have  become 
acquainted.  In  recapitulating  some  of  them 
we  may  be  able  to  add  a  few  further 
hints. 

First  of  all,  an  investor  may  of  course  be 
well  advised  to  insure  himself  against  death, 


246          THE  STOCK  EXCHANGE 

sickness,  fire,  burglary,  etc.,  so  reducing  that 
annual  surplus  which  would  otherwise  be 
available  for  investment  proper.  Then,  sec- 
ondly, he  may  use  another  part  of  his  surplus 
to  buy  his  own  house  by  instalments.  Often, 
though  not  always,  he  may  thus  make  a  very 
high  rate  of  interest  on  his  money;  and  if  in 
the  neighbourhood  in  which  he  lives  rents  are 
tending  to  rise  year  by  year,  he  may  look  not 
only  for  a  high  rate  of  interest  but  for  an  ap- 
preciation of  his  principal.  But  when  he 
comes  to  the  purchase  of  a  Stock  Exchange  se- 
curity he  should  be  careful,  in  the  first  place, 
that  he  buys  it  from  a  respectable  quarter, 
i.  e.  from  an  official  broker  of  a  good  Stock 
Exchange,  or  from  a  respectable  banker,  who 
acts  as  an  intermediary.  Any  one  who  is  in 
the  happy  position  of  being  able  to  invest 
frequently  should  certainly  be  in  touch  with  a 
good  broker,  or  better  still,  with  two,  if  eti- 
quette does  not  stand  in  the  way.  He  may 
very  well  ask  his  broker  to  send  a  short  list  of 
securities  of  various  types  and  yields  to  com- 
pare with  his  own  list.  The  advertisements 
and  circulars  which  come  by  post  from  unau- 
thorised brokers  and  bucket  shops  (often 
with  some  grand  title  to  suggest  that  they 
are  "investment"  companies  or  "bankers") 


CAUTIONS  AND  PRECAUTIONS    247 

should  be  treated  with  the  same  respect  as 
a  German  invitation  to  a  lottery.  Some- 
times these  companies  have  the  impudence 
to  ask  you  for  a  list  of  your  investments, 
and  to  promise  you  that  if  you  will  take 
their  advice  they  will  be  able  to  exchange 
them  for  equally  good  securities  which  will 
yield  you  one  or  two  per  cent.  more.  And 
they  will  charge  you  no  commission! 

This  is  very  kind  indeed,  and  many  simple 
folk  respond  to  their  appeal.  Probably  the 
so-called  "bank"  or  "investment"  company 
has  bought  a  lot  of  rubbish,  usually  called 
"bonds,"  from  shaky  industrial  concerns,  or 
from  half  bankrupt  states  and  municipalities 
of  South  America.  They  have  bought,  let  us 
say,  the  6  per  cent,  bonds  of  the  Yoko  Silk 
Company  in  Japan  at  60,  which  they  sell  you 
at  90,  the  5  per  cent,  bonds  of  the  Brazilian 

Province  of at  55,  which  they  sell  you  at 

75,  and  a  few  other  similar  bargains.  They 
tell  you  that  if  you  then  spread  your  risks 
scientifically  over  different  countries  you  will 
be  perfectly  safe.  You  perhaps  do  not  realise 
that  none  of  these  securities  which  you  are  ad- 
vised to  buy  are  quoted  in  the  London  Stock 
Exchange.  If  they  were,  the  game  would  be 
impossible.  As  it  is,  you  cannot  know  what 


248          THE  STOCK  EXCHANGE 

your  philanthropic  company  actually  gave 
for  them,  and  if  asked  they  explain  that 
officially  quoted  stocks  never  go  so  cheap  as 
those  they  are  able  to  offer  you.  Some  time 
after  you  have  been  gulled  you  may  be  forced 
to  sell  one  of  these  bargains,  and  then,  if  your 
company  is  still  in  existence,  it  will  tell  you 
that  all  the  stocks  you  bought  from  them  have 
fallen  heavily  in  price,  or  at  least  that  they  are 
not  immediately  saleable.  They  will  perhaps 
promise  to  make  inquiries  and  try  to  find  a 
purchaser.  Your  best  hope  then  is,  by 
threatening  them  with  exposure,  to  force 
them  to  pass  on  the  rubbish  they  have  sold 
you  to  some  equally  foolish  and  inexperienced 
person.  That  is  not  a  pleasant  thought.  But 
if  you  can  persuade  a  bucket  shop  to  buy  its 
wares  back  at  any  sort  of  price,  you  may  be 
sure  it  will  not  keep  them  in  its  larder. 

The  theory  of  geographical  distribution  is 
perfectly  harmless  so  long  as  you  keep  to 
good  marketable  securities  for  which  there 
are  official  quotations.  But  there  is  very 
little  in  it.  It  is  a  mistake,  of  course,  to  keep 
all  your  money  in  one  security  or  in  one  trade, 
or  in  securities  connected  with  one  trade. 
But  it  would  be  silly  to  interpret  the  proverb 
about  eggs  so  literally  that  one  should  make 


CAUTIONS  AND  PRECAUTIONS    249 

a  special  effort  to  scatter  one's  money  in  tinjr 
parcels  over  the  face  of  the  globe. 

Another  important  caution  is  to  beware  of 
shares  not  fully  paid  up.  Many  bank  and 
insurance  shares  are  of  this  description.  The 
majority  are  safe;  but  the  possible  risk  is 
too  serious  for  any  one  of  moderate  means  to 
undertake.  On  the  other  hand,  good  shares 
of  this  kind,  with  a  liability  of  perhaps  from 
75  to  50  per  cent.,  which  might  be  called  up 
in  an  emergency,  yield  a  rather  high  rate  of 
interest,  and  you  can  insure  against  a  call  at  a 
very  trifling  expense.  If  you  have  insured 
yourself  at  Lloyds  you  can  hold  shares  of  this 
description  and  sleep  on  them  comfortably. 

Apart  from  circulars,  the  investor  may 
easily  be  trapped  by  what  he  reads  in  news- 
papers, especially  the  concealed  advertise- 
ments which  often  appear  as  articles  in  organs 
not  known  to  be  disreputable.  Every  one 
who  has  had  any  experience  of  the  press  knows 
the  difficulties  and  dangers,  the  temptations 
and  embarrassments,  by  which  its  proprietors, 
managers,  and  editors  are  surrounded.  In 
Paris,  if  not  elsewhere,  there  are  newspapers 
(which  may  be  politically  square)  whose 
financial  columns  are  let  to  an  advertising 
company!  I  do  not  know  of  any  sovereign. 


250          THE  STOCK  EXCHANGE 

remedy.  It  is  only  by  degrees  that  a  reader 
can  discover  which  papers  are  independent 
and  which  are  not,  which  are  flabbily  opti- 
mistic, which  are  hopelessly  and  slavishly 
corrupt.  Newspapers  are  apt  to  shift  from 
one  class  to  another  as  they  change  their  pro- 
prietors, management,  and  staff.  Sometimes 
a  respectable  journal,  finding  its  advertising 
revenue  dwindle,  will  abandon  criticism  of 
prospectuses,  in  order  not  to  give  offence.  I 
am  glad  to  think  and  to  feel  sure  that  this 
policy  is  bad  in  the  long  run.  The  loss  of 
reputation  and  interest  will  prove  far  worse 
for  revenue  than  the  slight  temporary  disad- 
vantages which  it  is  sought  to  obviate. 

The  three  qualities  an  investor  should 
demand  and  look  for  in  his  newspaper  are — 

1.  Honesty,  i.  e.  unpurchasable  candour. 

£.  Sound  information  about  conditions  at 
home  and  abroad. 

3.  Criticism  directed  not  merely  to  the  dark 
side  of  the  picture,  but  to  all  the  con- 
siderations, good,  bad  and  indifferent, 
which  affect  security  values. 

It  is  right  that  newspaper  criticisms  of 
City  finance  should  err,  if  at  all,  on  the  side 
of  pessimism.  For  the  average  reader  errs  on 
the  other  side.  It  is  the  crude  and  greedy 


CAUTIONS  AND  PRECAUTIONS    251 

optimism  of  a  speculative  public  that  allows 
so  many  transparently  false  ventures  to  be 
successfully  launched.  But  if  the  number  of 
honest  newspapers  and  of  journalists  finan- 
cially competent  could  be  multiplied  in  all 
parts  of  the  world,  vast  sums  now  wasted 
could  be  saved,  and  many  a  rogue's  avenue 
to  affluence  would  be  closed.  To  found  and 
maintain  a  good  newspaper  is  one  of  the  most 
useful,  public  spirited,  and  patriotic  services 
that  a  man  can  perform.  But  it  is  a  task  not 
to  be  lightly  undertaken. 

For  the  rest,  the  investor,  having  found  his 
Stock  Exchange,  his  broker,  and  his  news- 
papers, and  bearing  in  mind  such  precepts 
touching  bonds,  preference  stocks,  etc.,  as  we 
have  been  able  to  provide,  will,  if  he  be  wise, 
above  all  remember  not  on  any  account  to 
allow  his  investment  to  exceed  his  capital. 
The  so-called  investor  who  buys  ten  times 
more  than  he  owns  is  a  miserable,  nervous, 
and  timid  creature;  for  every  movement  in 
his  "investments"  causes  him  ten  times  the 
amount  of  perturbation  which  it  ought  to 
cause  him.  He  is  always  cutting  losses,  or 
jumping  at  small  profits,  instead  of  letting 
his  original  judgment  stand.  Besides,  na 
investor,  unless  he  be  an  absolute  insider. 


252          THE  STOCK  EXCHANGE 

could  hope  to  make  money  after  borrowing  at 
4  or  5  per  cent,  and  paying  commissions. 
It  is  like  playing  against  the  bank  at  Monte 
Carlo.  The  essence  of  investment  is  that 
it  should  be  for  long  periods,  with  the  reser- 
vation that  the  investor  should  keep  a  suf- 
ficiently close  watch  on  his  holding  to  be 
ready  to  take  advantage  of  any  substantial 
rise  which,  in  his  judgment,  is  not  likely  to 
last.  People  should  take  care  to  keep  abreast 
of  political  and  economic  events  in  foreign 
countries  in  which  they  are  financially  in- 
terested. You  may  have  holdings  in  Spain, 
Greece,  Turkey,  Egypt,  Japan,  China  or 
South  America.  In  such  cases  you  should 
keep  an  eye  on  communications  in  respectable 
newspapers  dealing  with  affairs  in  these 
countries,  more  especially  if  they  are  critical.  | 
Rose-coloured  accounts,  accompanied  by  open  r 
or  concealed  advertising,  are  more  than 
worthless.  They  rather  provoke  suspicion; 
for  they  suggest  that  a  show  of  prosperity  and 
strength  is  being  made  in  London  for  the 
purpose  of  some  impending  credit  operation. 


GLOSSARY 

Account  Day. — The  last  of  the  three  days  on  which  London 
Stock  Exchange  bargains  are  settled. 

Allotment. — When  a  new  loan  is  issued  to  the  public  sub- 
scriptions are  invited.  If  the  loan  has  not  been  oversub- 
scribed the  applicants  receive  allotment  in  full.  If  it  has 
been  oversubscribed  the  amount  has  to  be  allotted,  or 
divided  up,  among  the  applicants. 

Arbitrage. — Stock  Exchange  transactions  between  two  coun- 
tries. If  the  same  stock  is  cheaper  in  New  York  than  in 
London  it  may  pay  a  London  operator  to  execute  an  order 
in  New  York,  and  vice  versa.  Similar  transactions  be- 
tween the  London  and  the  Provincial  Stock  Exchanges 
are  called  shunting. 

Bear. — An  operator  who  sells  "short,"  with  a  view  to  re- 
purchasing at  a  profit. 

Bonds.— Securities  representing  the  debts  of  a  public  authority 
or  of  a  company,  and  in  the  latter  case  often  secured  by  a 
mortgage.  They  are  usually  to  "bearer,"  with  interest 
coupons  attached,  and  are  transferable  by  delivery. 

Broker. — This  term  is  used  in  a  special  sense  for  a  member  of 
the  London  Stock  Exchange  who  buys  or  sells  securities 
for  the  public,  from  or  to  the  jobber. 

Bucket  Shop. — A  term  of  reproach  sometimes  applied  gener- 
ally to  all  outside  brokers  not  connected  with  a  Stock 
Exchange.  Some  are  unloading  shops  which  advertise 
to  catch  investors;  others  are  gambling  shops  which  offer 
facilities  to  speculators. 

Butt. — An  operator  who  buys  stock  for  which  he  does  not 
mean  to  pay,  with  a  view  to  reselling  at  a  profit. 

Bullion. — Gold  or  silver  in  bars. 

Carry  Over. — The  continuation  of  speculative  bargains  from 
one  account  to  another  on  the  London  Stock  Exchange. 

Coupons. — Interest  tickets  attached  to  bonds,  which  the  owner 
cuts  off  from  time  to  time  as  they  become  due  for  payment. 

Dealer. — See  Jobber. 

253 


254          THE  STOCK  EXCHANGE 

Debentures. — A  general  term  for  bonds,  but  not  necessarily  or 
usually  including  a  mortgage.  It  usually  means  a  floating 
charge  on  the  assets  of  a  company.  The  leading  English 
debentures  are  the  debenture  stock  of  English  railways. 
In  case  of  default  on  interest  the  debenture  holders  (though 
there  is  no  mortgage  on  the  line)  can  put  the  property 
in  the  hands  of  a  receiver. 

Deferred  Stocks. — Stocks  which  can  only  receive  interest  after 
a  dividend  has  been  paid  on  preference  and  preferred 
ordinary. 

Dividend. — Divisible  profit;  the  interest  declared  from  time 
to  time  by  a  company  on  its  shares,  and  paid  to  its  share- 
holders. 

GiU-edged  Securities. — A  term  applied  to  Consols  and  other 
first-class  securities  which  are  regarded  as  quite  safe. 

Jobber. — Jobbers,  or  dealers,  are  members  of  the  London  Stock 
Exchange  who  stand  in  the  house  and  "make  prices," 
buying  from,  or  selling  to,  the  brokers. 

Kaffirs. — The  Stock  Exchange  name  for  South  African  mining 
shares. 

Liability. — For  shares  not  fully  paid  up  the  holder  is  liable  in 
case  the  company  fails  or  requires  more  capital.  Thus,  on 
a  ten  pound  share,  with  one  pound  paid,  the  liability  is 
nine  pounds. 

Liquidation. — The  winding  up  of  a  company  in  bankruptcy. 
To  liquidate  is  to  realise  or  sell  out  securities.  A  liquid 
asset  is  a  security  which  can  easily  and  quickly  be  turned 
into  cash. 

Margin. — The  excess  percentage  over  and  above  the  market 
price  of  a  security  deposited  with  a  banker  in  return  for  a 
loan.  Thus  a  banker  may  require  a  five  per  cent,  margin 
of  protection  on  Consols,  and  ten  per  cent  on  railway 
stocks.  Margin  is  sometimes  called  "cover."  When  a 
security  depreciates  and  the  margin  runs  off,  more  cover  is 
required,  otherwise  the  security  will  be  sold. 

Options.— (See  p.  186). 

Ordinary  or  Common  Stock. — The  lowest  class  of  security 
except  where  deferred  stock  has  been  issued.  Ordinary 
ranks  after  preference,  as  preference  ranks  after  debenture 
for  interest. 

Par  Value. — The  face  value  of  a  stock.  The  par  value  of  a  ten 
pound  share  is  £10,  that  of  a  hundred  pound  share  £100. 

Preference  or  Preferred  Stock. — Securities  which  rank  before 
ordinary  or  common  stock  for  dividend. 

Prospectus. — A  published  invitation  to  the  public  to  invest  in 
a  new  loan  or  company. 


GLOSSARY  255 1 

Put  an&  Call.— (See  p.  186.) 

Rente. — A  French  term  for   debt   or   public  funds.     French 

rentes  are  the  equivalent  of  British  Consols. 
Script. — The  paper  receipt  for  a  new  security,  on  which  only 

one  or  two  instalments  have  been  paid. 
Short. — Selling  "short,"  i.  e.    selling  what   one  has  not  got.      tr 

(See  Bear.) 

Sinking  Fund. — A  fund  set  apart  for  the  redemption  of  debt. 
Trustee  Stocks. — Securities  in  which  Trustees  are  authorised 

by  law  to  invest. 
Turn. — The  jobber's  turn  is  the  difference  between  the  prices 

at  which  he  will  buy  and  sell  a  security. 
Underwriting. — An  agreement  to  take  a  new  capital  issue  at  a 

price  below  that  at  which  it  is  offered  to  the  public.    Th« 

discount  is  the  underwriter's  commission. 
Watered  Stock. — A  company  which  increases  its  nominal  cap- 
ital without  improving  its  assets  is  said  to  water  its  stock. 


BIBLIOGRAPHY 

1.  Stocks  and  Shares,  by  Hartley  Withers  (London:   Smith 
Elder  &  Co.,  1910). 

This,  like  the  author's  previous  treatise,   "The  Meaning  of  Mone 
immediately  became  a  standard  book.    Mr.  Withers,  as  City  Editor  of 


Morning  Post,  has  of  course  an  intimate  acquaintance  with  London  finance, 
which  appears  in  every  page  of  this  scholarly  and  brilliant  volume. 

2.  Stock  Exchange  Law  and  Practise,  by  W.  A.  Bewes  (Lon- 
don:  Sweet  &  Maxwell,  1910). 

An  excellent  book  addressed  to  lawyers  and  professional  men,  which  large 
Investors  should  place  on  their  shelves  for  reference.  It  deals  with  the  rules 
and  regulations  of  the  London  Stock  Exchange,  Its  relations  to  provincial 
exchanges,  and  to  English  law  as  Interpreted  by  the  courts. 

3.  The  History,  Law  and  Practise  of  the  Stock  Exchange,  by 
A.  P.  Poley  and  F.  H.  Carruthers  Gould  (London:  Pitman  & 
Sons,  1907). 

This  Is  an  alternative  to  the  preceding  work  In  our  list,  and  has  consid- 
erable merits  of  its  own. 

4.  Stock  Exchange  Securities,  by  [Sir]  Robert  Giffen  (London: 
George  Bell  &  Sons,  1877). 

Essays  by  the  celebrated  economist  and  statistician  on  the  causes  of  fluc- 
tuations in  Stock  Exchange  Securities. 

5.  Stock  Exchange  Investments  in  Theory  and  Practise,  by 
Joseph  Burn,  1909  (London:   C.  &  E.  Layton,  1909). 

An  admirable  course  of  lectures  delivered  to  students  at  the  Institute 
of  Actuaries,  full  of  historical  Information  and  practical  guidance. 


256         THE  STOCK  EXCHANGE 

6.  A  Plain  Guide  to  Investment  and  Finance,   by  T.  E. 
Young  (London:    Macdonald  &  Evans,   1908). 

The  first  part  of  this  useful  book  contains  a  good  deal  of  practical  guidance 
to  investors. 

7.  Every  Man  His  Own  Broker,  by  J.  Mortimer. 

The  first  book  on  London  Stock  Jobbing.  The  first  edition  was  published 
In  1761. 

8.  The  Work  of  Wall  Street,  by  Sereno  S.  Pratt  (New  York: 
D.  Appleton  &  Co.,  1910). 

The  book  was  written  in  1903,  and  though  not  brought  up  to  date  in  this 
edition,  is  by  far  the  best  description  I  have  read  of  the  Wall  Street  system. 

9.  Forty  Years  of  American  Finance,  by  A.  D.  Noyes  (New 
York:    G.  P.  Putnam's  Sons,  1909). 

A  trustworthy  history  of  American  finance  from  1865  to  1907. 

10.  Corporation  Finance,  by  Edward  S.  Meade  (New  York: 
D.  Appleton  &  Co.,  1910). 

A  most  illuminating  work  to  which  the  present  writer  is  very  much  in- 
debted. It  is  chiefly  concerned  with  the  promotion  and  marketing  of  Ameri- 
can railroad  and  industrial  securities. 

11.  The  History  and  Methods  of  the  Paris  Bourse,  by  E.  Vidal. 

A  learned  and  acute  study  published  at  Washington  in  1910  by  the  National 
Monetary  Commission  of  the  United  States  (61st  Congress,  2nd  Session, 
Document  No.  573). 

12.  London  Stock  Exchange  Commission.     Minutes  of  Evi- 
dence.   London,  1878  [C.  2157.— 1]. 

This  contains  the  evidence  of  many  official  and  leading  members  of  the 
London  Stock  Exchange,  with  important  descriptions  and  criticisms  of  its 
organisation  and  methods  thirty-three  years  ago. 


HENRY     HOLT    AND     COMPANY 

THE  HOME  UNIVERSITY 

LIBRARY  of  Modern  Knowledge 

The  editors  are  Professors  Gilbert  Murray,  H.  A.  L. 
Fisher,  W.  T.  Brewster  and  J.  Arthur  Thomson. 

Jackets  in  variegated  colours .  Cloth  bound ,  good  paper, 
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Each  complete  and  sold 
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LITERATURE  AND  ART. 

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73.  EURIPIDES  AND  HIS  AGE.  By  Gilbert  Murray,  Regius  Pro- 
fessor  of  Greek,  Oxford. 

101.  DANTE.  By  Jefferson  B.  Fletcher.  Columbia  University.  An  inter- 
pretation  of  Dante  and  his  teaching  from  his  writings. 

2.  SHAKESPEARE.  By  John  Masefield.  "One  of  the  very  few  in- 
dispensable  adjuncts  to  a  Shakespearean  Library." — Boston 
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81.  CHAUCER  AND  HIS  TIMES.  By  Grace  E.  Hadow,  Lecturer  Lady 
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who  has  brains  enough  to  understand  sense." — New  York  ^ur^. 

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from  the  inside  of  newspaper  organization  as  it  exists  to-day. 

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Erskine,  Columbia  University. 

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how  a  better  account  of  French  Literature  could  be  given  in  250  pages." 
— London  Times. 

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62.  PAINTERS  AND  PAINTING.    By  Sir  Frederick  Wedmore.    With 
16  half-tone  illustrations. 

38.  ARCHITECTURE.  By  Prof.  W.  R.  Lethaby.  An  introduction  to 
the  history  and  theory  of  the  art  of  building. 

108.  PATRIOTISM  IN  LITERATURE.    By  John  Drinkwater. 

109.  MUSIC.    By  Sir  W.  H.  Hadow. 


NATURAL  SCIENCE. 

DISEASE  AND  ITS  CAUSES.    By  W.  T.  Councilman,  M.  D., 

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SEX.    By  J.  Arthur  Thompson  and  Patrick  Geddes,  joint  authors 
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PLANT  LIFE.  By  J.  B.  Farmer,  D.  Sc.,  F.  R.  S.,  Professor  of  Bot- 
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form  and  function. 

THE  ORIGIN  AND  NATURE  OF  LIFE.  By  Benjamin  M.  Moore, 
Professor  of  Bio-Chemistry,  Liverpool. 

CHEMISTRY.    By  Raphael  Meldola,  F.  R.  S.,  Professor  of  Chem- 
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ELECTRICITY.    By    Gisbert    Kapp,   Professor    of    Electrical    En- 
gineering,  University  of  Birmingham. 

THE  MAKING  OF  THE  EARTH.  By  J.  W.  Gregory,  Professor  of 
Geology,  Glasgow  University.  38  maps  and  figures.  Describes 
the  origin  of  the  earth,  the  formation  and  changes  of  its  surface  and 
structure,  its  geological  history,  the  first  appearance  of  life,  and  its 
influence  upon  the  globe. 

MAN:  A  HISTORY  OF  THE  HUMAN  BODY.  By  A.  Keith,  M.  D., 
Hunter ian  Professor,  Royal  College  of  Surgeons,  London.  Shows 
how  the  human  body  developed. 

NERVES.  By  David  Fraser  Harris,  M.  D.,  Professor  of  Physi- 
ology,  Dalhousie  University,  Halifax.  Explains  in  non-technical 
language  the  place  and  powers  of  the  nervous  system. 
AN  INTRODUCTION  TO  SCIENCE.  By  Prof.  J.  Arthur  Thomson, 
Science  Editor  of  the  Home  University  Library.  For  those  unac- 
quainted with  the  scientific  volumes  in  the  series,  this  should  prove 
an  excellent  introduction. 

EVOLUTION.  By  Prof.  J.  Arthur  Thomson  and  Prof.  Patrick 
Geddes.  Explains  to  the  layman  what  the  tide  means  to  the  scien- 
tific world. 

ASTRONOMY.  By  A.  R.  Hinks,  Chief  Assistant  at  the  Cambridge 
Observatory.  "Decidedly  original  in  substance,  and  the  most  readable 
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long  time."—  Nature. 

PSYCHICAL  RESEARCH.  By  Prof.  W.  F.  Barrett,  formerly  Presi- 
dent  of  the  Society  for  Psychical  Research. 

THE  EVOLUTION  OF  PLANTS.  By  Dr.  D.  H.  Scott,  President 
of  the  Linnean  Society  of  London.  The  story  of  the  development 
of  flowering  plants,  from  the  earliest  zoological  times,  unlocked  from 
technical  language. 

BIOLOGY.    By  J.  Arthur  Thomson  and  Patrick  Geddes. 


43.  MATTER  AND  ENERGY.    By  F.  Soddy,  Lecturer  in  Physical 
Chemistry  and  Radioactivity,  University  of  Glasgow.    "Brilliant. 
Can  hardly  be  surpassed.    Sure  to  attract  attention."—  New  York 
Sun. 

41.  PSYCHOLOGY,  THE  STUDY  OF  BEHAVIOUR.    By  William  Me- 

Dougall,  of  Oxford.    A  well  digested  summary  of  the  essentials  of  the 
science  put  in  excellent  literary  form  by  a  leading  authority. 

42.  THE  PRINCIPLES  OF  PHYSIOLOGY.    By  Prof.  J.  G.  McKendrick, 

A  compact  statement  by  the  Emeritus  "Professor  at  Glasgow,  for 
uninstructed  readers. 

37.  ANTHROPOLOGY.  By  R.  R.  Marett,  Reader  in  Social  Anthro- 
pology, Oxford.  Seeks  to  plot  out  and  sum  up  the  general  series  of 
changes,  bodily  and  mental,  undergone  by  man  in  the  course  of 
history.  "Excellent.  So  enthusiastic,  so  clear  and  witty,  and  so 
well  adapted  to  the  general  reader."— American  Library  Association 
Booklist. 

17.  CRIME  AND  INSANITY.  By  Dr.  C.  Mercier,  author  of  "Crime 
and  Criminals,"  etc. 

12.    THE  ANIMAL  WORLD.    By  Prof .  F.  W.  Gamble. 

15.  INTRODUCTION  TO  MATHEMATICS.  By  A.  N.  Whitchead, 
author  of  "Universal  Algebra." 

PHILOSOPHY  AND  RELIGION. 

69.  A  HISTORY  OF  FREEDOM  OF  THOUGHT.  By  John  B.  Bury, 
M.  A.,  LL.  D.,  Regius  Professor  of  Modern  History  in  Cambridge 
University.  Summarizes  the  history  of  the  long  struggle  between 
authority  and  reason  and  of  the  emergence  of  the  principle  that  co- 
ercion of  opinion  is  a  mistake. 

96.    A  HISTORY  OF  PHILOSOPHY.    By  Clement  C.  J.  Webb,  Oxford. 

35.  THE  PROBLEMS  OF  PHILOSOPHY.  By  Bertrand  Russell,  Lee- 
turer  and  Late  Fellow,  Trinity  College,  Cambridge. 

60.  COMPARATIVE  RELIGION.  By  Prof.  J.  Estlin  Carpenter.  "One 
of  the  few  authorities  on  this  subject  compares  all  the  religions  to 
see  what  they  have  to  offer  on  the  great  themes  of  religion."— Chris- 
Han  Work  and  Evangelist. 

44.  BUDDHISM.    By  Mrs.  Rhys  Davids,  Lecturer  on  Indian  Philoso- 
phy, Manchester. 

46.    ENGLISH  SECTS:  A  HISTORY  OF  NONCONFORMITY.    ByW.B. 

Selbie.    Principal  of  Manchester  College,  Oxford. 


55.  MISSIONS:  THEIR  RISE  AND  DEVELOPMENT.  By  Mrs.  MM- 
dell  Creighton,  author  of  "History  of  England."  The  author  seeks  to 
prove  that  missions  have  done  more  to  civilize  the  world  than  any 
other  human  agency. 

52.  ETHICS.  By  G.  E.  Moore,  Lecturer  in  Moral  Science,  Cambridge. 
Discusses  what  is  right  and  what  is  wrong,  and  the  whys  and  where- 
fores. 

C5.  THE  LITERATURE  OF  THE  OLD  TESTAMENT.  By  George  F. 
Moore.  Professor  of  the  History  of  Religion,  Harvard  University  "A 
popular  work  of  the  highest  order.  Will  be  profitable  to  anybody 
who  cares  enough  about  Bible  study  to  read  a  serious  book  on  the 
subject."— American  Journal  of  Theology. 

88.  RELIGIOUS  DEVELOPMENT  BETWEEN  OLD  AND  NEW  TESTA- 
MENTS.  By  R.  H.  Charles,  Canon  of  Westminster.  Shows  how 
religious  and  ethical  thought  between  180  P.  C.  and  100  A.  D.  grew 
naturally  into  that  of  the  New  Testament. 

50.    THE  MAKING  OF  THE  NEW  TESTAMENT.    By  B.  W.  Bacon, 

Professor  of  New  Testament  Criticism,  Yale.  An  authoritative 
summary  of  the  results  of  modern  critical  research  with  regard  to 
the  origins  of  the  New  Testament. 

SOCIAL  SCIENCE. 

91.  THE  NEGRO.  By  W.  E.  Burghardt  DuBois,  author  of  "Souls  of 
Black  Folks,"  etc.  A  history  of  the  black  man  in  Africa,  America  and 
elsewhere. 

77.  CO-PARTNERSHIP  AND  PROFIT  SHARING.  By  Aneurin  WU- 
liaras,  Chairman,  Executive  Committee,  International  Co-opera- 
tive Alliance,  etc.  Explains  the  various  types  of  co-partnership  and 
profit-sharing,  and  gives  details  of  the  arrangements,  now  in  force  in 
many  of  the  creat  industries. 

99.  POLITICAL  THOUGHT:  THE  UTILITARIANS.  FROM  BENT- 
HAM  TO  J.  S.  MILL.  By  William  L.  P.  Davidson. 

103.  ENGLISH  POLITICAL  THOUGHT.  From  Locke  to  Bentham.  By 
Harold  J.  Laski,  Professor  of  Political  Science  in  the  London  School  of 
Economics. 

98.  POLITICAL  THOUGHT:  FROM  HERBERT  SPENCER  TO  THE 
PRESENT  DAY.  By  Ernest  Barker,  M.  A. 

79.  UNEMPLOYMENT.  By  A.  C.  Pigou,  M.  A.,  Professor  of  Political 
Economy  at  Cambridge.  The  meaning,  measurement,  distribution, 
and  effects  of  unemployment,  its  relation  to  wages,  trade  fluctuations, 
and  disputes,  and  some  proposals  of  remedy  or  relief. 


80.    COMMON-SENSE  IN  LAW.    By  Prof.  Paul  Vinogradoff,  D.  C.  L., 

LL.  D.  Social  and  Legal  Rules— Legal  Rights  and  Duties— Facts 
and  Acts  in  Law — Legislation — Custom — Judicial  Precedents — Equity 
— The  Law  of  Nature. 

49.    ELEMENTS  OF  POLITICAL  ECONOMY.    By  S.  J.  Chapman, 

Professor  of  Political  Economy  and  Dean  of  Faculty  of  Commerce 
and  Administration,  University  of  Manchester. 

11.  THE  SCIENCE  OF  WEALTH.  By  J.  A.  Hobson,  author  of  "Prob- 
lems of  Poverty."  A  study  of  the  structure  and  working  of  the  modern 
business  world. 

1.  PARLIAMENT.  ITS  HISTORY,  CONSTITUTION,  AND  PRAC- 
TICE. By  Sir  Courtenay  P.  Ilbert,  Clerk  of  the  House  of  Commons. 

16.  LIBERALISM.  By  Prof.  L.  T.  Hobhouse,  author  of  "Democracy  and 
Reaction."  A  masterly  philosophical  and  historical  review  of  the  subject. 

5.  THE  STOCK  EXCHANGE.    By  F.  W.  Hirst,  Editor  of  the  London 
Economist.    Reveals  to  the  non-financial  mind  the  facts  about  invest- 
ment, speculation,  and  the  other  terms  which  the  title  suggests. 

10.  THE  SOCIALIST  MOVEMENT.  By  J.  Ramsay  Macdonald,  Chair- 
man of  the  British  Labor  Party. 

28.  THE  EVOLUTION  OF  INDUSTRY.    By  D.  H.  MacGregor,  Professor 
of  Political  Economy,  University  of  Leeds.    An  outline  of  the  recent 
changes  that  have  given  us  the  present  conditions  of  the  working  classes 
and  the  principles  involved. 

29.  ELEMENTS  OF  ENGLISH  LAW.    By  W.  M.  Geldart,  Vinerian 
Professor  of  English  Law,  Oxford.    A  simple  statement  of  the  basic 
principles  of  the  English  legal  system  on  which  that  of  the  United 
States  is  based. 

32.  THE  SCHOOL:  AN  INTRODUCTION  TO  THE  STUDY  OF  EDU- 
CATION. By  J.  J.  Findlay,  Professor  of  Education,  Manchester. 
Presents  the  history,  the  psychological  basis,  and  the  theory  of  the 
school  with  a  rare  power  of  summary  and  suggestion. 

6.  IRISH  NATIONALITY.    By  Mrs.  J.  R.  Green.    A  brilliant  account 
of  the  genius  and  mission  of  the  Irish  people.    "An  entrancing  work, 
and  I  would  advise  every  one  with  a  drop  of  Irish  blood  in  his  veins 
or  a  vein  of  Irish  sympathy  in  his  heart  to  read  it."—  New  Yor\  Time* 
Review. 

107.    STUDY  OF  HEREDITY.    By  Ernest  William  MacBride. 


GENERAL  HISTORY  AND  GEOGRAPHY. 

102.  SERBIA.  By  L.  F.  Waring,  with  preface  by  J.  M.  Jovanovitch, 
Serbian  Minister  to  Great  Britain.  The  main  outlines  of  Serbian 
history,  with  special  emphasis  on  the  immediate  causes  of  the  war. 
and  the  questions  in  the  after-the-war  settlement. 

33.  THE  HISTORY  OF  ENGLAND.    By  A.  F.  Pollard,  Professor  of 
English  History,  University  of  London. 

95.  BELGIUM.  By  R.C.K.  Ensor,  Sometime  Scholar  of  Balliol  College. 
The  geographical,  linguistic,  historical,  artistic  and  literary  associa- 
tions. 

100.  POLAND.  By  J.  Alison  Phillips,  University  of  Dublin.  The  history 
of  Poland  with  special  emphasis  upon  the  Polish  qustion  of  the  pre- 
sent day. 

34.  CANADA.    By  A.  G.  Bradley. 

72.    GERMANY  OF  TO-DAY.    By  Charles  Tower. 

78.  LATIN  AMERICA.  By  William  R.  Shepherd,  Professor  of  His- 
tory,  Columbia.  With  maps.  The  historical,  artistic,  and  commercial 
development  of  the  Central  South  American  republics. 

18.  THE  OPENING  UP  OF  AFRICA.    By  Sir  H.  H.  Johnston. 

19.  THE  CIVILIZATION  OF  CHINA.    By  H.  A.  Gtfes,  Professor  of 
Chinese,  Cambridge. 

36.    PEOPLES  AND  PROBLEMS  OF  INDIA.    By  Sir  T.  W.  Holderness, 

"The  best  small  treatise  dealing  with  the  range  of  subjects  fairly  in- 
dicated by  the  title."—  The  Dial. 

26.  THE  DAWN  OF  HISTORY.  By  J.  L.  Myers,  Professor  of  Ancient 
History,  Oxford. 

92.  THE  ANCIENT  EAST.  By  D.G.  Hogarth,  M.  A.,F.  B.  A.,F.S.  A., 
Connects  with  Prof.  Myers's  "Dawn  of  History"  (No.  26)  at  about 
1000  B.  C.  and  reviews  the  history  of  Assyria,  Babylon,  Cilicia,  Persia 
and  Macedon. 

30.    ROME.    By  W.  Warde  Fowler,  author  of  "Social  Life  at  Rome,"  etc. 

13.    MEDIEVAL  EUROPE.    By  H.  W.  C.  Davis,  Fellow  at  Balliol  Col- 

lege,  Oxford,  author  of  "Charlemagne,"  etc. 
3.    THE  FRENCH  REVOLUTION.    By  Hilaire  Belloc. 

57.  NAPOLEON,  By  H.  A.  L.  Fisher,  Vice-Chancellor  of  Sheffield  Uni- 
versity.  Author  of  "The  Republican  Tradition  in  Europe." 

20.  HISTORY  OF  OUR  TIME.  (1885-1911).    By  C.  P.  Gooch. 

22.  THE  PAPACY  AND  MODERN  TIMES.  By  Rev.  William  Barry, 
D.  D.,  author  of  "The  Papal  Monarchy,"  etc.  The  story  of  the  rise  and 
fall  of  the  Temporal  Power. 

108.    WALES.    By  W.  Watkin  Davies,  M.A..  F.R.  Hist.S.,  Barrister-at- 
Law,  author  of  "How  to  Read  History,"  etc. 


110.    EGYPT,    By  E.  A.  Wallis  Budge. 

104.  OUR  FORERUNNERS.    By  M.  C.  Burkitt,  M.A.,  F.S.A.    A  com- 
prehensive  study  of  the  beginnings  of  mankind  and  the  culture  of  the 
prehistoric  era. 

4.    A  SHORT  HISTORY  OF  WAR  AND  PEACE.    By  G.  H.  Pern., 

author  of  "Russia  in  Revolution,"  etc. 
94.    THE  NAVY  AND  SEA  POWER.    By  David  Hannay,  author  of  "Short 

History  of  the  Royal  Navy,"  etc.    A  brief  history  of  the  navies,  sea 

Power,  and  ship  growth  of  all  nations,  including  the  rise  and  decline 

of  America  on  the  sea,  and  explaining  the  present  British  supremacy. 
8.    POLAR   EXPLORATION.     By   Dr.  W.  S.  Bruce,  Leader  of  the 

"Scotia"  expedition.    Emphasizes  the  results  of  the  expeditions. 
51.    MASTER  MARINERS.    By  John  R.  Spears,  author  of  "The  His- 

tory  of  Our  Navy,"  etc.    A  history  of  sea  craft  adventure  from  the 

earliest  times. 

86.    EXPLORATION  OF  THE  ALPS.    By  Arnold  Lunn,  M.  A. 
7.    MODERN  GEOGRAPHY.    By  Dr.  Marion  Newbigin.    Shows  the  re- 
lation of  physical  features  to  living  things  and  to  some  of  the  chief  in- 
stitutions of  civilization. 

76.  THE  OCEAN.  A  GENERAL  ACCOUNT  OF  THE  SCIENCE  OF 
THE  SEA.  By  Sir  John  Murray/K.  C.  B.,  Naturalist  H.  M.  S.  "Chal- 
lenger," 1872-1876,  joint  author  of  "The  Depths  of  the  Ocean,"  etc. 

84.  THE  GROWTH  OF  EUROPE.  By  Granville  Cole,  Professor  of 
Geology,  Royal  College  of  Science,  Ireland.  A  study  of  the  geology 
and  physical  geography  in  connection  with  the  political  geography. 

105.  COMMERCIAL  GEOGRAPHY.    By  Marion  I.  Newbigin.    Funda- 
mental conceptions  of  commodities,  transport  and  market. 

AMERICAN  HISTORY. 


47.  THE  COLONIAL  PERIOD  (1607-1766).  By  Charles  McLean  An- 
drews, Professor  of  American  History,  Yale. 

82.  THE  WARS  BETWEEN  ENGLAND  AND  AMERICA  (1763-1815). 
By  Theodore  C.  Smith,  Professor  of  American  History,  Williams 
College.  A  history  of  the  period,  with  especial  emphasis  on  The  Re- 
volution and  The  War  of  1812. 

67.  FROM  JEFFERSON  TO  LINCOLN  (1815-1860).  By  William  Mac- 
Donald.  Professor  of  History,  Brown  University.  The  author  makes 
the  history  of  this  period  circulate  about  constitutional  ideas  and  slavery 
sentiment. 

25.  THE  CIVIL  WAR  (1854-1865).  By  Frederick  L.  Paxson,  Professor 
of  American  History,  University  of  Wisconsin. 

39.  RECONSTRUCTION  AND  UNION  (1865-1912).  By  Paul  Leland 
Haworth.  A  History  of  the  United  States  in  our  own  times. 

Published  by 
HENRY  HOLT  AND  COMPANY,  19  West  44th  St.,  New  York 


¥I 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

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This  book  is  due  on  the  last  date  stamped  below,  or 
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